By Jameel Ahmad, Global Head of Currency Strategy & Market Research at FXTM, commentary following news that the IMF has cut its global growth forecast.
The headline that the IMF has downgraded its economic growth projections for the first time since July 2016 is naturally not positive news for investor sentiment. There are a few ways that this news can be digested. One is to accept that expecting global growth at a rate of 3.7% in comparison to 3.9% still represents a healthy pace of growth when you consider the severe turbulence that the global economy has faced over the past 10 years. But on the other side, there are concerning comments from the IMF that a combination of trade tensions and stress in emerging markets is behind the modest downgrade in growth expectations, along with even more worrying comments that the IMF is concerned that global growth might have plateaued, indicates to a degree that there are also reasons for investors to be uneasy about the IMF downgrade.
For one, the comment that global growth might have plateaued indicates to a degree that current growth rates are as good as the global economy will get. This means that any optimism global growth could peak above 4% over the next few years is ambitious at best. When you then consider that there are a plethora of trade uncertainties that remain unknown and are completely unpredictable, then this might be just the first in a series of several growth downgrades from different institutions. The external uncertainties around trade tensions are also one of the underlying factors behind the stress seen in emerging markets, because investors naturally do not want to carry risk into their portfolios.
When I combine all these together, I would ultimately be more concerned about all of these unknowns and the comment that global growth might have plateaued rather than accepting that a downgrade from 3.9% to 3.7% is not that disastrous in the greater scheme of things.