The notion of a global slowdown is gaining traction today after the IMF downgraded its economic outlook. The cut to its forecast puts growth at the lowest levels since the financial crisis. The news was likely a major factor in market action today, with the broad market S&P 500 moving sharply lower and perceived safe havens like gold moving higher. Interest rates also ticked lower as investors shed risk.
The IMF now says that the global economy will grow 3.3% this year, down from the 3.5% forecast back in January. The IMF has already cut its forecast twice in the past six months and this figure would be the weakest growth rate seen since 2009.
A recent article from Bloomberg quoted Gita Gopinath, the IMF’s chief economist, as stating “This is a delicate moment” for the global economy. He also suggested that current growth projections for next year may be precarious.
The IMF does seem to believe that economic growth will stage a recovery in the second half of this year. It has also suggested that growth will top-out sometime next year around 3.6%. According to Business Insider, the report stated “Although a 3.3 percent global expansion is still reasonable, the outlook for many countries is very challenging, with considerable uncertainties in the short term, especially as advanced economy growth rates converge toward their modest long-term potential.”
Risks Skewed to the Downside
Risks appear to be skewed to the downside as numerous factors have the potential to weigh on growth further. A “no-deal” Brexit scenario, a failure of U.S./China trade negotiations or an escalation of North Korea’s nuclear ambitions are a few of the issues that could weigh on the global economy. In the U.S., growth could also begin to fade further as the effects of tax cuts and government spending wear off.
A Dovish Fed
The Fed and its policy agenda have been the topic of significant debate in recent months. The central bank has essentially pulled a sharp U-turn in recent months-going from a forecast for three hikes this year to zero. Some analysts have suggested that the Fed will need to cut rates again to combat the slowdown. President Trump has also suggested that the central bank cut rates and/or start implementing QE4. Although it is unclear if the central bank will bend to political pressure, the Fed may decide at some point that enough is enough is key data points remain on the weak side of the ledger.
Any rate cuts or QE measures put into place may keep a floor under equity prices-at least in the short-term- but may have a bearish effect on the dollar index. Such action could be considered bullish for gold and other dollar-denominated asset classes.
The gold market is moving higher today as stocks sink and risk aversion takes hold. Spot gold was last up $7.61/oz at $1,304.71. The bulls have retaken the key $1,300 level and will now look to build more positive momentum. The market has been in a consolidation phase for the last several weeks and now may have built a base on which higher prices can be sustained.
Ongoing worries over global growth may provide the market with enough ammunition to continue higher despite recent dollar strength. Lower equity prices, lower rates and a weaker dollar could prove to be the perfect recipe for a significant leg higher in the market that could take prices back to recent highs and beyond.