Yesterday the International Monetary
Fund (IMF) announced a reduction in its estimates for global economic growth in
both 2014 and 2015. It now holds that it will be down to 3.3% from the previous
estimate of 3.8% this year, and to 3.8% from 4.00% next year.
While these rates show reductions they
continue to indicate a growing trend and, historically, any expansion over 3%
is regarded as a positive.
A takeaway from the announcement is
the fund’s concern that the growth that does take place will be uneven. The
United States will lead the way but practically all other economies on the
planet that matter will show weaker growth outcomes. They include China,
Europe, Japan and Latin America.
In regard to Europe, the IMF singled
out Germany for special mention. Its growth forecast was cut sharply, to 1.4%
from 1.9%. This is at a time when recent German industrial goods orders were
the worst they have been since 2009. Hopefully, this is a temporary phenomenon,
brought about by tensions between Russia and Ukraine and the trouble in the
Middle East.
Madame Lagarde was, as usual, particularly
concerned about low inflation in the Eurozone. This has been a constant refrain
of hers now for over a year. The ECB is certainly aware of the problem but
opposition from Germany to a lightening of the current regime of austerity,
particularly in those UE member states that are recovering from the fallout of
the great financial crisis, is hampering efforts at a solution. Now, it would
appear from comments made yesterday, even the IMF is coming around to the view
that austerity might have served its purpose and the time might be right for
some expansive spending.
Ironically, the decline in German industrial
goods orders and the IMF downgrade of German growth come right after the calls
from many economists for that country to start spending a lot more on its
infrastructure in order to spur EU growth.
The
effects on the markets
The announcements from the IMF come
on the back of aggressive purchasing of US dollars in recent times, so no
surprises there. The troubles in Germany can be expected, also, to tend to prolong
the decline of the Euro, as the economy that Angela Merkel presides over has long
been the locomotive of Euro zone economic fortunes.
Equities seem to be taking a hit but
whether this is as a result of reduced global growth estimates or the
realisation that the cheap money tap that had fuelled the rampant bull market
is about to be switched off with the upcoming elimination of Quantitative
Easing in the US, is open to question. Perhaps it is a bit of both.
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