The International Monetary Fund (IMF) has lowered its growth forecast for the global economy. It says the world economy will now grow by 3.6% in 2014 and 3.9% in 2015; it grew at three percent in 2013. (Source: International Monetary Fund, April 8, 2014.)
I see the IMF forecast on global growth as being far too optimistic. In fact, I think we’d be lucky to get three percent growth in the global economy this year. Key indicators I follow suggest demand in the global economy is close to outright collapsing.
Consider the chart below of the Baltic Dry Index (BDI). This index tracks the shipping prices of dry goods in the global economy. If it declines, it suggests global demand is declining. The BDI has plunged more than 48% since the beginning of the year, pointing to slow growth for the global economy ahead.
Manufacturing is another indicator of demand in the global economy that we follow. If manufacturing activity increases, it means demand is increasing and that consumers are buying more. Sadly, global manufacturing is suggesting an economic slowdown is the most likely scenario ahead.
The JPMorgan Global Manufacturing Purchasing Managers Index declined to its lowest level in five months in March. (Source: Markit, April 1, 2014.)
Adding to the misery, most economic hubs are telling the same tale.
The eurozone is still in trouble; the European Central Bank is contemplating its own quantitative easing program as Italy just reported its highest unemployment rate ever recorded. China is pumping out weak economic data. Japan’s economic slowdown isn’t taking any break despite the central bank of the country keeping its printing presses going.
In the U.S., as the Federal Reserve pulls back on its paper money printing program, the stock market and economy may both get in trouble. The major problems in the U.S. economy now are slowing corporate earnings growth, rising prices, rising interest rates, declining real incomes, and soft consumer spending.
There’s a perfect storm brewing for the global economy. The optimistic prediction by the IMF of growth, dear reader, will eventually be lowered (this happened last year and the year before that, too—it’s nothing new to us).
Investors here in the U.S. shouldn’t take the economic slowdown in the global economy lightly. Between 2009 and 2013, U.S. exports to the global economy increased by about 50%. If there’s a global economic slowdown, U.S. exports will decline and economic growth in the U.S. economy will be affected.
About half of the S&P 500 companies derive sales from outside of the U.S. With revenues from public companies already under pressure, softness in the global economy could break the camel’s back.