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DAVID MALPASS: IMF LOWERS GLOBAL GROWTH FORECAST, BUT V-SHAPED UPTURN COMES INTO VIEW

Posted By Ruth King on January 25th, 2012

http://finance.townhall.com/columnists/davidmalpass/2012/01/25/imf_lowers_global_growth_forecast_but_vshaped_upturn_comes_into_view

• We now think that the U.S. and global upswing from the deep 2011 funk may be strong enough to create some quarters in 2012 with U.S. growth well above 3%.  This type of burst in growth is normal after a recession but has been delayed in the current expansion by the long series of policy setbacks – Japan’s 2011 earthquake, the ECB’s lack of engagement until late 2011, the U.S. policy disasters (too many to name), and the 2010 oil spill,.  Earlier we raised our 2012 U.S. forecast to 3% Q4/Q4. Some quarters may materially exceed that after what we think will be a subpar first quarter.

Indicators of a stronger-than-expected V-shaped 2012 include the drop in jobless claims; pent-up demand for autos and auto production;

• hiring by small- and medium-sized businesses in ADP data and the BLS household survey (which shows the economy added 1.3 million jobs since August 2011);

• the acceleration in bank lending, up 10% year-over-year (primarily due to increased lending by large U.S. banks which have been taking share from small banks and European banks);

• an increase in capital spending, which remains below 2000 levels even in nominal terms. Real investment in industrial equipment is still 6% below the Q3 2000 high;

• at last, the possibility of an increase in housing starts as people outside the booms in Washington and New York begin to bottom fish.

• Data from European Union purchasing managers rose to 50.4.  Our earlier pieces have noted the upturn in Europe’s bank stocks since their January 9 bottom.

IMF Downgrade Marks the Bottom?

The IMF lowered its global growth forecast for 2012 to 3.3% today (was 4% in September.)  We think this marks the end of the global downgrade process that started in the middle of 2011 with the double dip recession forecasts in August, the China hard-landing bets and the European deterioration.

• The IMF expects less U.S. growth (1.8% versus 2.2% at the World Bank), less growth in China (8.2% vs 8.4%), and less growth in Europe (-0.5% vs -0.3%), but that’s made up for in its overall global forecast by the heavier weight placed on China through the PPP methodology.  The IMF is actively seeking increased resources from its members for it to apply to the European debt crisis.

• The IMF global growth forecast is based on “purchasing power parity” weightings and therefore differs substantially from the World Bank’s forecast (which was lowered to 2.5% last week, see our January 20 piece).  The IMF’s PPP technique puts a larger weighting on China’s GDP and GDP growth weight (and correspondingly smaller weighting on the U.S. and most other countries).  PPP is based on the view that China’s GDP is substantially understated by an undervaluation of its exchange rate (currently 6.3 yuan per dollar).  Per the IMF, the yuan/dollar exchange rate would be 4.1 if prices in China were equilibrated to dollar prices outside China.  For example, rice in China is cheaper than world market prices at current exchange rates.  It’s weighted heavily in PPP calculations, because China consumes a lot of rice.  If China’s rice output and consumption were valued at U.S. prices (instead of the prices prevailing in China), then China’s GDP would be much bigger in dollar terms than currently stated.  Under the IMF’s PPP methodology, China’s IMF – scale GDP is $12.5 trillion (versus $7.7 trillion at the current exchange rate.)  This higher GDP level for China helps China argue for an increased share in the IMF.

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