Ideas & Debate

What IMF economic forecast means for the global markets

BEIJ

A worker in a textile factory in Binzhou in China's eastern Shandong province. PHOTO | AFP

According to IMF’s World Economic Outlook (WEO) Update, January 2019, global expansion is set to weaken at 3.5 percent in 2019 and 3.6 in 2020, between 0.2 and 0.1 percent below last October’s projections.

Negative effects of tariff increases enacted in the United States and China, a possible “no deal” withdrawal of the United Kingdom from the European Union and a greater-than-envisaged slowdown in China are some of the factors that informed the downward revision.

In sub-Saharan Africa, although headline growth is expected to pick up from 2.9 percent in 2018 to 3.5 percent in 2019 and 3.6 percent in 2020, the region masks significant variation in performance, with over one-third of the region’s economies expected to grow above 5 percent in 2019 to 2020. Today’s note focuses on some of the underlying assumptions highlighted in the forecast.

What happens to our markets if they hold true?

First and critical assumption is the US rate hike overhang. The excerpt reads: “…while the US Federal Reserve raised the target range for the federal funds rate to 2.25-2 percent in December, it signalled a more gradual pace of rate hikes in 2019 and 2020…” A more gradual pace means most emerging/frontier equity markets could experience some lift off (already happening) after having sold off over the past 12 months having priced in a more aggressive pace. Furthermore, a “less aggressive Fed” means foreign-currency sovereign credit spreads could ease up substantially making plans for Kenya’s Eurobond III less difficult.

Another vital assumption involves commodities. The IMF’s excerpt reads: “…average oil prices are projected at just below $60 per barrel in 2019 and 2020 (down from $69 and $66 respectively, in the last WEO), metal prices are expected to decrease 7.4 percent year-over-year in 2019 (a deeper decline than anticipated last October) and to remain roughly unchanged in 2020. Price forecast for most major agricultural commodities have been revised modestly downwards…”

A drop in oil prices means inflationary pressures will still remain weak and folks steering monetary policy at the Central Bank of Kenya may need not to worry about headline inflation blowing-off the lid. This is also great for bond prices and by extension equity valuations.

Another key assumption presumes that the US-Sino trade tensions would remain unresolved after the current 90-day “truce” ends on March 1, 2019. The excerpt reads: “…forecasts incorporates the US tariffs announced through September 2018 and retaliatory measures.” The net effect could potentially result in investors generally lowering exposure to emerging/frontier market economies for 2019. Overall, should all these assumptions become a reality, it’s a bag full of positive outcomes. Good for the local bourse.

That done. I’m mindful tomorrow is Valentine’s Day and in the spirit of love and caring, here’s a line from the “I’m in the Market for you (1929)” song by Joseph McCarthy. This one is for my Apple Eye. “…I’ll have to see my broker, find out what he can do, because I’m in the market for you. You’re going up in my estimation, I want a thousand shares of your caresses too. We’ll count the hugs and kisses, when dividends are due, because I’m in the market for you...”