Success has many fathers, failure is an orphan

It is probably a little early to draw major conclusions from the current earnings season, however, there are some signs, according to Merrill Lynch that guidance for the third quarter could weaken. Central banks remain in focus as the Bank of Japan announced that it will follow in Mario Draghi’s footsteps and do what it takes to get to the target 2% inflation, any talk of exiting the monetary stimulus program is premature. Later on Wednesday, we get the release of the Federal Reserve’s latest interest rate decision. The accompanying statement will probably be of more interest to market participants.

The IMF revised their expectations for global growth in the coming two years on Monday. They lowered forecasts for the UK economy on the back of a weak first quarter, to 1.7%. It is worth bearing in mind that this downgraded level of economic growth is no worse than that of the rest of Europe. The IMF also lowered expectations for economic growth in the US from 2.3% for 2017 to 2.1%, however, they left economic growth for the global economy overall at 3.5% for this year and 3.6% for next year. They take the view that slightly weaker economic growth in the US will be offset by stronger growth from Europe and China in particular.

Their reduction in the outlook for growth of the worlds largest economy was predicated on the Trump presidency ability to deliver on the promised fiscal reforms.

There have been plenty of studies on the ability of bodies such as the world bank and the IMF to predict economic growth or oncoming recessions. The conclusion is simple, they fail miserably. In 2008, there was a consensus from forecasters that not a single economy will fall into recession in 2009, according to an FT report. Bodies such as the IMF have highly sophisticated models to try and predict future economic growth, however, they remain poor at forecasting economic recessions. Is this because the global economy is just too complicated to forecast? Or perhaps they over analyse.

Economic recessions tend to occur when central banks put the brakes on economic growth and leverage has become unsustainable. Currently, the one thing in favour of the global economy is there is no central bank in the world wants economic growth to slow or fall into recession. Of course, that does not mean it won’t happen but history shows not many will forecast it, but many will claim to have with hindsight.

Posted on July 25, 2017 .