The outlook for the developed economies has deteriorated with the IMF downgrading their growth forecast for this year and 2012. To highlight some of the issues I have extracted the following key themes from the IMF’s World Economic Outlook that was released during September.
The IMF’s growth forecast for developed economies in 2011 was cut by 0.6 percentage points to 1.6%, while the 2012 forecast was reduced by 0.7 percentage points to 1.9%. The forecast for emerging markets was reduced by only 0.2 percentage points for 2011 to 6.4%, and by 0.3 percentage points for 2012 to 6.1% (see charts attached). Interestingly, the GDP growth forecast for almost every major part of the world was lowered for both 2011 and 2012. Japan was the only exception; GDP growth for 2011 was raised by 0.2 percentage points to -0.5%.
A barrage of shocks hit the international economy this year:
Japan was struck by the devastating Great East Japan earthquake and tsunami
Unrest swelled in some oil-producing countries.
The handover from public to private demand in the US economy stalled.
Euro area encountered major financial turbulence.
Global markets suffered a major sell-off of risky assets, and there are growing signs of spill-overs to the real economy.
The risks are clearly to the downside and, according to the IMF, two warrant particular attention from policymakers. Either one of these eventualities would have severe repercussions for global growth.
The first is that the crisis in the euro area runs beyond the control of policymakers, notwithstanding the strong policy response agreed at the 21 July 2011, EU summit. Policymakers must swiftly ratify the commitments made at the July summit, and in the meantime, the European Central Bank (ECB) must continue to intervene strongly to maintain orderly conditions in sovereign debt markets. Leaders must stand by their commitments to do whatever it takes to preserve trust in national policies and the euro. Furthermore, given declining inflation pressure and heightened financial and sovereign tensions, the ECB should lower its policy rate if downside risks to growth and inflation persist.
The second is that activity in the United States, already softening, might suffer further blows – for example, from a political impasse over fiscal consolidation, a weak housing market, rapid increases in household saving rates, or deteriorating financial conditions. Deep political divisions leave the course of US policy highly uncertain.
Risks in emerging and developing economies seem less severe. Signs of overheating still warrant close attention, particularly from the monetary and prudential authorities. Risks related to commodity prices and social and political unrest in some parts of the world continue to loom large.
Against this backdrop we remain cautiously positioned across our funds, with underweight equity positions. In addition as a tactical call we have picked up exposure to funds, such as the Allan Gray Stable Fund, which offers some hedging characteristics. We are watching developments in global markets vigilantly and if there are any changes in the macro economic outlook we will change the asset allocation of the funds accordingly. But for now we are positioned for a world of continued uncertainty, volatility and sub-par growth in the developed world.
“And in today already walks tomorrow.”
~Samuel Taylor Coleridge
Chief Investment Officer