Less Shine In The Sentiment Formula

The IMF yesterday downgraded its forecasts for global growth as well as its real GDP estimates for all the big economy regions. The organization now thinks GDP growth might have amounted to 2.9% last year. Not only the worst year since 2009, that was down from April 2019 approximations of 3.6% and the original forecasts which always start out near 4%.

Worse, estimates for this year are being trimmed. Though pretty much everyone has become more optimistic about the global economy, what does that really mean? The major models are starting to get the sense that it doesn’t quite mean what it is supposed to.

Global growth appears to have bottomed out but there is no rebound in sight and risks ranging from trade tensions to climate shocks makes the outlook uncertain, a top International Monetary Fund official said on Monday.

This seems to be the emerging consensus as the pendulum begins to swing back in the other (pessimistic) direction away from unchallenged optimism. From early September forward, renewed positivity had meant since the economy seemed to have avoided a worse fate it would immediately start to get better. Having emerged from recession’s shadow, right back to growth and booms again.

But that’s not quite how it’s gone, nor does it appear like it will turnaround soon. At some point the turnaround must turn around. The longer it goes without, the more questions will be raised.

Has the economy actually reached its bottom?

Indications like the OECD’s Composite Leading Indicators (CLI) are a big reason why it has been assumed the economy has. In nearly every case (except those like Japan), CLI figures make it look like the trend has plumbed its ultimate depth and even if it’s not heading too far too fast in the right direction at least it’s not getting worse.

By looking at the charts, it seems a reasonable assumption; once the leading indicators turn around, everything turns around thereafter.

But these are preliminary estimates and more so being moved by the changes in the various yield curves around the world. If it turns out that the world is misreading the bond market’s signals, and the global economy does take another leg lower, then these numbers will all be revised.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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Gary Anderson 1 month ago Contributor's comment

Unfortunate slowing of the economy impacted by global slowdown.