IMF: Global growth forecasts for 2018 and 2019 revised by 0.2% to 3.9% y/y - Rabobank

Analysts at Rabobank note that the IMF revised up global growth forecasts for 2018 and 2019 by 0.2% to 3.9% y/y, which would be the highest since 2011.

Key Quotes

 “The revision reflects increased global growth momentum and the expected impact of the recently approved US tax policy changes.” Indeed, following Trump’s major legislative victory at the end of last year, when the US Congress approved a comprehensive package of tax cuts, Rabobank’s Philip Marey upgraded his forecast for 2018 US GDP growth to 2.5% from 2% previously. That said, Philip also anticipates the positive impact on the US economy to decline in the following years. “While we expect the beneficial impact on GDP growth to be modest and short-lived, the adverse effect on the public debt to GDP ratio is likely to be substantial and long-lasting.” Essentially, short-term gains with long-term negative consequences, but the bulls do not seem to be concerned about that at this stage.”

“The IMF also revised higher its growth forecasts for the Eurozone, particularly for Germany, Italy and the Netherlands “reflecting the stronger momentum in domestic demand and higher external demand.”

“Prospects for emerging economies are also generally positive as reflected in persistently strong demand for risky assets. For the first time since 2010 EM stocks outperformed the S&P 500 Index last year on the back of acceleration in capital inflows. Given that the share of EM equities in fund investors’ global equity portfolios reportedly is still below the average of the past 15 years, it is reasonable to assume that capital inflows to emerging markets will prevail in 2018.”

“Risks to the global growth forecast seem to be broadly balanced in the near term, but remain skewed to the downside over the medium term, according to the IMF. Given “rich asset valuations and very compressed term premiums”, a correction in financial markets could undermine upbeat sentiment (we haven’t witness a proper correction in US stocks for over a year). After raising rates gradually over the past two years, the Fed may accelerate the pace of tightening faster than the markets anticipate, which would tighten financial conditions, the IMF also warned. Our baseline scenario assumes that the Fed will be able to raise rates on just two occasions this year due to persistently low inflation. The IMF also listed protectionism, geopolitical tensions and extreme weather as other risk factors to the global economy over the mid-term horizon.”