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The World Bank wasn’t the only one to lower its view in the past month; IMF Lowers Global Growth Forecast by Most in Three Years. The world economy will grow 3.5% in 2015, down from the 3.8% pace projected in October, the International Monetary Fund (IMF) said in its quarterly global outlook. The Washington-based lender also cut its estimate for growth next year to 3.7%, compared with 4% in October. The growth-forecast reduction was the biggest since January 2012. The IMF marked down 2015 estimates for places including the Eurozone, Japan, China and Latin America. The deepest reductions were in places suffering from crises, such as Russia, or for oil exporters including Saudi Arabia. IMF Managing Director Christine Lagarde outlined the sobering outlook, saying that oil prices and U.S. growth “are not a cure for deep-seated weaknesses elsewhere.” The U.S. is the exception. The IMF upgraded its forecast for the world’s largest economy to 3.6% growth in 2015, up from 3.1% in October. “Cheap oil, more moderate fiscal tightening and still-loose monetary policy will offset the effects of a gradual increase in interest rates and the curb on exports from a stronger dollar”, the Fund said.
Our worry is that U.S. growth is slipping from the high rate of the 2nd half of 2014 at the same time that global growth remains weak. Rather than seeing the rest of the world catch up to U.S. growth, we think the risk is higher that the global slowdown and the higher U.S. dollar slow growth down in the U.S. in 2015. We are already starting to see that in the 4th quarter earnings results in the U.S. While significant earnings ‘misses’ and/or forward guidance reductions by industry giants Microsoft, Proctor & Gamble, Dupont, Caterpillar, Pfizer and McDonalds were all blamed on the negative impact of the higher U.S. dollar on overseas sales, there was clearly an impact from slower growth in those foreign economies as well.
We are seeing support from this view in the ISI Surveys that remain our best source for economic forecasting. The ISI Company Surveys fell again in January as slower sales at retailers, auto dealers, and airlines weighed on results. Recent data from the consumer surveys shows post-holiday moderation. Despite the downtick in the consumer surveys, the recent trend has been positive supported by stronger employment, higher asset prices, and lower energy costs. Airlines are also ‘flying high’ on reduced fuel prices. But foreign growth remains exceptionally weak and this is the bigger problem. The China Sales Survey is at a two year low, and the Europe Sales Survey dropped to 44.6. Weak global growth and softer energy activity are weighing on the industrial surveys. The composite survey result is shown in the chart below. While still strong, it is clearly losing momentum and that does not bode well for earnings growth.
Investors appear somewhat oblivious to the economic risks though as they believe the continued borrowing and buying of debt by central banks will support stock values. But what makes the stay-or-go decision tough for most investors is that many central banks also appear committed to driving up stock and bond prices as a way to encourage growth. The strategy behind the ECB’s new quantitative-easing program rests on a hoped-for ‘chain reaction’: The ECB will create money, which it will then use to buy vast amounts of government bonds. At that point, the sellers of those bonds will find their pockets stuffed with cash, and presumably use their new-found money to buy shares and other bonds. The rising prices of those financial assets will then drive down the cost of capital for companies, and that will encourage investment and growth. Or so the theory goes.
Outside of the U.S., Asian stock markets have also been strong as low interest rate policies in Japan and China are leading to inflows into the stock market. But both the Japanese and Chinese economies have been coming up short on their growth targets as well. Japan slipped back into recession in the 3rd quarter of 2014 while China missed its growth target, growing at just 7.4%, its lowest level in 15 years. Should investors be paying attention to economic indicators or just playing with the easy money policies of the Bank of Japan or the PBOC (China)? To help with that question, we noticed another indicator we like to look at is also sending warning signals. The price of copper has always been a great indicator of global economic activity since it has so many uses in various industries. Accurate forecasting of economic activity by movements in copper prices have earned it the moniker “Dr. Copper”. While stocks in Hong Kong have continued to rise over the last few months, the price of copper is clearly heading back down. This is a departure from the tighter relationship that we have seen over the past years and shown in the chart below.