IMF cuts global growth

Given the dynamic environment we are in right now, with restructuring in China, commodity prices’ collapse, Fed’s transition to rate normalisation whose timing is still uncertain, easy monetary conditions everywhere, and emerging markets’ difficulties, it is apt that the IMF revised lower its global growth projections.

US Dollar Stacks
Source: Bloomberg

The IMF now estimates global growth at 3.1%, from 3.3% from its July forecast, citing softer growth outlook for emerging markets and weak commodity prices as the reasons. However, its projections for China remains at 6.8% for 2015 and 6.3% for 2016. The downward revision seems to underline the view that the world economy is unable to recover fully from the global financial crisis.

Tellingly, IMF new chief economist Maurice Obstfeld said in the latest world economic outlook, ‘Six years after the world economy emerged from its broadest and deepest post-war recession, a return to robust and synchronised global expansion remains elusive.’ The Fund’s outlook is increasingly dour, adding that there is a 50% likelihood that global growth may fall below 3% next year, which is a level equivalent to a global recession in the past.

It is no secret that the IMF wants the Fed to delay its planned rate hike until next year. And the economic undercurrents increasingly lean towards that direction, with the latest US payrolls data disappointing hawks to a large extent.

Furthermore, the IMF sees risks for emerging economies. As growth prospects deteriorate in emerging markets, with the looming Fed hike in the backdrop, investors are taking their monies out of this region. The Institute of International Finance said that we will see this year the first net capital outflows in emerging markets in 27 years, estimating that more than a trillion dollars are exiting.

Market reaction to the IMF’s latest report is rather muted, although it will likely weigh on sentiments in the longer term. US equities were largely soggy, as trade data came in negatively. Trade deficit widened to $48.3 billion, as August exports fell to the lowest in four years, while imports picked up. The strong US dollar continues to affect US trade amid weak global demand. Ironically, the USD returned below 95.50, the region it hit after the surprisingly soft non-farm payrolls reading.


Oil jumps

The dollar retreat, coupled with expectations of easing supply glut, helped lift crude prices. WTI rose to a five-week high at around $49, while Brent gained over 5%, surpassing the $50 mark to around $52. Bloomberg noted that OPEC secretary-general Abdalla Salem El-Badri expected the oil market to eventually strengthen as major producers reduced investment and world demand likely to grow. He said that there is currently an oil oversupply of about 200 million barrels.

The Energy Information Administration raised its global oil demand forecast for 2015 to an average of 93.79 million barrels per day, from 93.62 million a month ago. In addition, the EIA expected lower crude production this year and the next.


Looking to Asia

The Bank of Japan (BOJ) is meeting today, and most economists do not expect announcement of more easing. However, market watchers will keep an eye for new language, suggesting that the BOJ may expand its quantitative and qualitative easing (QQE) programme at the end of October.

Although with governor Kuroda being quite upbeat about inflation targets, we may have to look at other speakers, including from the government, to have a better sense of Japan’s economic outlook.

Asia trade may be a little on the back foot today, taking its lead from the US session overnight. Australia and Japan already started under some pressure, and the rest of Asia is likely to adopt the same cautious tone. It’s worth pointing out that the rallies seen in the previous few sessions are not really based on improving macro picture, but on speculations of more monetary firepower.


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