When Red turns into Crimson

The International Monetary Fund (IMF) has once again lowered the 2019 global growth forecast to now stand at 3% – the weakest since 2009. This is the fifth consecutive cut, as the rate has progressively declined from the highest point of 3.9% to the rate announced on Tuesday. The 2020 growth estimate has also been lowered by a further 0.1%, to 3.4% but the latter figure is entirely dependent on the recovery of highly distressed economies like Turkey and improvements in global weak spots like Brazil. The supranational entity has cited a broad deceleration across the world’s largest economies, primarily due to trade tensions which are hindering expansion. In addition, the IMF also slashed the growth in trade estimated volume to 1.1%, down from 3.6% in 2018. In the first 6 months of the year, trade volume growth fell to the lowest level since 2012 but forecasts an improved situation next year with an increase of 3.2%.

The costs and uncertainty brought about by the trade tensions have impacted company investment and supply chains negatively. The IMF also estimates that the trade tensions which commenced in 2018, will leave global output at 0.8% or $700 billion lower in 2020 than it would have been should an internationalist policy stance been adopted instead.

In the report, IMF Chief Economist Gita Gopinath wrote that the synchronized downturn and general uncertainty is resulting in a bleak future outlook. She added that there is no room for erroneous policy making and that countries need to focus on downscaling the geopolitical tensions and the implications derived from such uncertainties. She concluded by stating that “such actions can help boost confidence and reinvigorate investment, manufacturing and trade”.

The current market sentiment has slightly ameliorated due to recent talks between the United States (US) and China, as well as due to the increased possibility of the United Kingdom (UK) leaving the European Union (EU) with a deal in place on October 31. The situation is not yet definitive and is in evolution especially since few details have so far emerged of the extent of the preliminary progress announced by Donald Trump in the US-China talks. Furthermore, Brexit EU negotiator Michel Barnier and British Brexit minister Stephen Barclay, have both come out cautiously optimistic that there is still time to reach a definitive agreement which would avoid the possibility of a no deal Brexit. However, all would then rely on the UK Parliament’s approval of such deal.

The IMF report does in fact cite that although “risks seem to dominate the outlook”, things could change for the better if agreements in US-China and EU-UK talks are reached, coupled with further monetary easing in many countries that would help boost demand. However, “monetary policy cannot be the only game in town and should be coupled with fiscal support where fiscal space is available and where policy is not already too expansionary”, the IMF added.

Mark Zandi, chief economist of Moody’s Analytics, believes that a combination of these factors could help avoid a recession. He did however state that the risks of a recession over the next 12 to 18 months are “uncomfortably high” and that the best we could hope for at this stage, even if a recession is circumvented, is a much weaker economy. His conviction also comes from the fact that, although he agrees that governments should up their spending to help the respective economies, he believes that this will not happen.

Other economists seemed less pessimistic than Zandi but are still concerned about future growth prospects. Eswar Prasad, a professor at Cornell University, is convinced that consumer spending will sustain growth in several economies but is also aware of the fact that this in isolation is not sustainable in the longer term.

In her first major address last week, Kristalina Georgieva, previously World Bank chief executive officer and who has succeeded Christine Lagarde as IMF chief, stated that a greater than originally anticipated slowdown could require a coordinated fiscal stimulus in order to help mitigate negative consequences.

Reduction in global growth forecast figures reflect the specific reduced forecasts for practically all major economies around the globe. More specifically, US growth estimates were lowered to 2.4% (from 2.6%) this year but increased to 2.1% (from 1.9%) for next year while Euro-area growth was reduced to 1.2% (from 1.3%) in 2019 and 1.4% (from 1.6%) in the subsequent 12 months. This came as a result of the current weakness of the German economy, particularly in the automotive sector. Expectedly, UK’s growth forecasts for the current year were also reduced to 1.2% (from 1.3%). Same applies to China’s projections both for this year and the next, as these were reduced to 6.1% (from 6.2%) and 5.8% (from 6%) respectively.

As things stand, it is difficult to foresee any particular improvements in growth rates over the next five years in the world’s major economies such as China, US and the Euro-area. On the contrary, the IMF cautioned about the likelihood of downgrading the forecasts further in the months and years to come. For this to be mitigated, the IMF has encouraged economies to adopt a cohesive approach in order to diminish global tensions and increase confidence.

Though difficult to materialise, the reversal of the current negative trend will perhaps cause red to turn into scarlet rather than crimson.

David Baldacchino, MSc Wealth Management (Edinburgh), B.Com (Hons) Banking and Finance (Melit.), DipFA, is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]