We're doomed (again)! Oh-em-gee!
"IMF slashes growth forecasts!" This was the last piece of news I saw before I went to bed last night and started snoring. Yeah, yeah I thought. Sure, sure. Somehow it didn't give me the same nerve-wracking punch that previous scares gave me.
And by the look of it, European equities weren't spooked either. At the time the "IMF slash" was splashed on the headlines, the DJ Stoxx-50 Index had already been coming off their intra-day lows. Did the scary headline did anything?
If it did, it wasn't evident in the index's reaction. The Stoxx-50 index continued with its march higher before closing by only a teenie-weenie 0.38% for the day. This was also evident in the S&P 500's minute 0.1% slip.
What gives? Shouldn't equity markets be selling big time? Especially with IMF top honcha (I guess this is the feminine version of honcho), Christine Lagarde, warning that the world is facing "a 1930s moment, in which inaction, insularity and rigid ideology combine to cause a collapse in global demand". "This is a defining moment… It is not about saving any one country or region. It is about saving the world from a downward economic spiral."
In its latest World Economic Outlook report, the IMF lowered its global growth projection to 3.3% this year (down from 4% forecast last September) and 3.9% in 2013 (down from 4.5%).
Perhaps what gives is we've heard this tune before. And heck, this is good news compared with what the World Bank (WB) saw in its crystal ball only a few days back. The WB sees the world economy expanding by only 2.5% this year and by 3.1% the next and warned of "a downturn so severe it would eclipse the chaos that followed the collapse of Lehman Brothers in 2008."
Perhaps what gives is that these gloomy forecasts and dire warnings are already priced in and that unless current conditions deteriorate further, it would be good news.
Perhaps what gives is that financial markets have developed long-term memories. If they have, I'm sure they still remember how, in its April 2009 WEO report, the IMF predicted global activity to decline by 1.3% that year.
As it turned out the IMF was overly pessimistic. According to its own database, world output contracted by only 0.6% in 2009 and you already know what transpired that year -- equity and commodity markets soared.
You could argue that it's because of the various stimuli - fiscal and monetary - that had been implemented as a result. But that's precisely my point. Dire warnings force authorities into a counter strike.
Perhaps what gives is that forecasting's really a mug's game. Forecasters have a tendency to take current events and extrapolate them into the future -- a boom is predicted to continue forever and a bust would continue towards the depths of hell.
Here's proof. In its World Economic Outlook report dated 29 January 2008, the IMF printed, "global growth is projected at 4.1 percent in 2008, down from 4.9 percent in 2007."
Hmmm…global growth will slow just a few notches in 2008, eh? Actual fourth quarter 2008 real GDP growth was clocked at 2.8%.
The IMF's forecast was clouded by the boom of previous years so much so that even six months later, on 15 July 2008, it's still forecasting decent - if not strong - world growth. "Global growth is projected to moderate from 5% in 2007 to 4.1% in 2008 and 3.9% in 2009."
Enough said.
