What the IMF thinks

The IMF issued two quarterly reports, the Wold Economic Outlook Update and the Global Financial Stability Update . Reading these two reports reminded me of the recent article I wrote about the stock market not being the economy One focused on the outlook for the global economy while the other looked at the markets.

The IMF view on the global economy

It isn’t good I’m afraid. The IMF predicts that global growth will fall by -4.9% in 2020. This is a downgrade on their April prediction, as more data has become available.

This recession is breaking the mold. Usually when there is a recession, people dip into their savings or get financial help from family to maintain their spending, so consumption is affected less. With Covid 19, consumption has dropped significantly due to social distancing, lockdowns, loss of income and loss of consumer confidence. This reduction in demand has in turn resulted in a lack of investment by companies.

The loss of jobs has also been catastrophic, with the IMF estimating that the equivalent of 130 million full time jobs were lost in Quarter 1 and that will increase to 300 million in Quarter 2.

Whether a country has dealt with Covid 19 well or not will not prevent them feeling the impact of the virus. For countries that have coped well, there will be continued social distancing, greater scarring of the scale of the disruption on business in Quarters 1 & 2 and the ongoing impact on production as businesses ensure worker safety. For countries who have not coped well, further social distancing and lockdowns will be required.

It’s not all doom and gloom though and the IMF predicts Quarter 2 will be the trough and global GDP will start to improve in Quarter 3 with projected growth of 5.4% in 2021. This comes will a big pinch of salt though as there are so many uncertainties that can affect their forecast, namley:

  • The length of the pandemic and the lockdown
  • Social distancing and the impact it will have on spending
  • Workers being able to return to work or find other employment
  • Scarring from firm closures
  • The impact of changes regarding workplace safety
  • Reconfiguration of the global supply chain

The IMF view on the markets

In a much shorter report, the IMF also looked at the markets. Central banks around the world have pumped $11 trillion into the global economy. The swift intervention of central banks has been a major factor in the market recovery. This has led to growing investor optimism of a speedy V type recovery. These investors have seen the central banks interventions and believe that they will continue to pump money into economies to keep it afloat. This has also lead to investors taking more investment risk, something we have seen with the share price of the bankrupt Hertz skyrocketing and investors piling into companies worst affected by the coronavirus.

We have spoken before of how this has created a disconnect between what is happening in the markets and the economy as a whole. Where investors expect a fast recovery, economists don’t. The longer this pandemic goes on, the greater the chance of investor optimism fading and markets being revalued more in line with the economy.

Debt will also be a major threat to the markets. Of the $11 trillion pumped into the economy, $5.4 trillion was used for liquidity support. The debt burdens on companies may become unmanageable. The number of insolvencies may also be a test for the banking sector and how they can absorb the number of defaults that they will get from both individuals and companies. This squeeze on liquidity will then make it harder for companies to access finance or they may have to pay more to get it.

The outlook from the IMF isn’t good and you can see how much is dependent on central banks around the world continuing to pump money into the system. But doing that will create its own problems.

If you have any questions, drop me an email at steven@bluewaterfp.ie