Global Economy to be Stronger in 2016
By: Jeffrey Kleintop
The International Monetary Fund (IMF) garnered headlines last week for lowering their world economic growth outlook. What was less discussed, but potentially more important for investors, was that they maintained their outlook for stronger growth in 2016. They're not alone. In fact, most forecasters, including the World Bank, the Organization for Economic Cooperation and Development (OECD), and the consensus of economists' forecasts tracked by Bloomberg, foresee a stronger world economy in 2016 than in 2015 or 2014.
A Brighter 2016: World GDP by Forecaster and Year
Source: Charles Schwab, Bloomberg, International Monetary Fund, Organization for Economic Cooperation and Development, and the World Bank. Data as of 10/6/2015.
In particular, the IMF forecasts:
- The Eurozone will accelerate slightly (to 1.6%) from the pace in 2015 which was already the fastest growth since 2010.
- Economic growth in the United States will improve slightly (to 2.8%), making for the fastest annual pace of growth since 2005.
- Japan's weak economy will reaccelerate by about half of a percentage point (to 1.0%) from 2015 in 2016.
- Emerging market economies are also expected to grow about a half of a percentage point faster in 2016 (to 4.5%).
- The biggest downgrades to the IMF growth outlook were in commodity-driven developed and emerging economies in recession: Brazil, Russia, and Canada. Of these, only Canada's economy is expected to grow in 2016.
In addition, the IMF sees an increase in global inflation from 0.3% in 2015 to 1.2% in 2016, potentially marking a big step back from the risk of deflation (for more on the risk of deflation see our recent publication Deflation: What Investors Need to Know).
Why pay attention to IMF forecasts?
The reason investors may want to pay attention to these forecasts is because the IMF has more often been a better predictor of growth and inflation than central banks, such as the Federal Reserve (Fed).
A study conducted by Bloomberg on the ability of the world's major central banks (the Federal Reserve, Bank of Canada, Bank of England, the European Central Bank, and the Bank of Japan) to accurately forecast their own economies showed that the best forecaster of all wasn't a central bank, it was the IMF. The IMF beat the Bank of Canada, the winner among central banks, more often than not on forecasting growth and inflation.
Out-forecasting the Fed
The markets have been obsessed with the Fed's point of view lately. Stocks around the world, measured by the MSCI AC World Index, fell 6% after the Fed announced they were delaying hiking rates on September 17 on fear that the Fed knew something markets didn't about the global growth situation. Then stocks rose all the way back to the pre-Fed announcement level when the minutes to the meeting came out last week revealing no material change in the Fed's outlook and the expectation that interest rates would be raised soon. Yet the IMF was a better forecaster of U.S. economic growth than the Fed in seven of last 10 years.
This doesn't mean the IMF forecasts are always accurate; there is never certainty in forecasting. But if the market is going to focus on forecasts, it may be best to pay closer attention to those from the IMF which point to better growth in 2016, rather than reacting to fears of a continued global slowdown seen in 2015.
Faster economy, better markets
We believe the world economy will see the pace of growth improve somewhat in 2016, after four years of intermittent recessions among major economies from 2011-2014. While slightly below the pace of the mid-2000s, global growth of 3.5% would mark a return to the average pace of growth over the past 50 years. Faster global economic growth should translate into better sales for companies and drive faster earnings growth than in 2015, potentially supporting the stock markets around the world.