The International Monetary Fund (IMF) has once again cut its forecast for growth in the global economy, and warned about a backlash against what it calls “cross-border economic integration” and what the rest of us call free trade deals. Citing what are now the usual suspects in the global economic slowdown, the IMF pointed to continued sluggish growth in China, slumping oil prices and weakness in major market economies like the United States.
This downgrade from 3.4% to 3.2% sounds incidental, but when you consider the size of the global economy, even a change that small represents a fantastically large number in terms of dollar value. It’s worth noting the higher number was the IMF’s January estimate, meaning that huge dollar value has vaporized in just the last three months.
Zero Growth Equals a Recession
In the complicated math of global economics the world doesn’t have to actually get below zero growth for its economy to shrink. The IMF considers a growth rate of 3% to be a technical recession, which means the global economy is dancing on the line right now. At 3% growth the IMF starts using terms like “stall speed” and “stagnation” to describe the international financial outlook. The IMF also admitted that growth worldwide has been too slow for too long, exceeding even its own gloomy expectations.
The IMF downgraded expectations for growth in virtually all the major world economic powers including Europe, Japan, China and the United States. In addition, two economies were called out as potential trouble spots: Brazil and Russia. Russia’s economy is expected to shrink by nearly two percent and Brazil, stuck in a brutal and unrelenting recession, is expected to contract by nearly four percent. Just about any country that is a net exporter of oil felt a chill from the recent report. Though oil prices have struggled back up to the forty-dollar-a-barrel range, it’s unknown if that pricing is sustainable with Saudi Arabia and Iran still struggling over the oil market.
One surprise the IMF warned might be waiting in the shadows are shocks such as currency devaluations. That’s almost certainly a reference to China but could also apply to Brazil, Russia and Japan. Brazil and Russia would likely experience currency devaluation as part of their shrinking economies, and likely Japan as it’s actively working to depress the value of its currency to make its goods and services more attractive in global markets. Sudden currency devaluations could rock global markets in a large-scale version of what happened in Greece.
We’ve Got Our Own Problems
Here at home the recovery all but stalled in the first quarter, with growth numbers barely above zero. Corporate profits are struggling and market watchers are expecting a five to eight percent whack on stock prices. Some Wall Street insiders are suggesting the looming crisis points out the limits of central bank policy tools to actually improve anything. We appear to be holding our collective breath for some shock to tip the entire market into negative territory.
All this should be continued good news for gold prices. The fear and uncertainty, potential massive devaluations in currency, and turmoil in markets should insure investors stay wedded to liquid hard asset allocations for the—in all senses—indefinite future.