IMF WEO

The International Monetary Fund released it’s bi-annual World Economic Outlook on April 8, 2014.  Key takeaways from the report include:

• The global economy is gradually recovering from the 2008 debt crisis, but growth continues to remain below average and uneven across many countries.
• The IMF predicts global GDP growth of 3.6 percent in 2014 increasing to 3.9 percent in 2015.
• The IMF sites risks to rising growth such as low inflation, potential capital flow reversals, and geopolitical uncertainties.

Gross domestic product (GDP) is defined as the market value of all officially recognized final goods and services within a country in a year.  The GDP number is usually quoted as a “Real GDP” which is Nominal GDP minus Inflation.  So if a country is growing at 6% and has inflation of 3%, the real growth of that economy would be 3%.  For the United States, the average real GDP growth over the past 50 years is 3.1% (see figure 1).  For the United States, the IMF projects growth of 2.8% in 2014 up from 1.9% recorded for 2013.

Figure 1: US Real GDP Growth

Source: JP Morgan

Looking across the entire world, stronger GDP growth continues to come from Emerging and Developing Economies (China, India, Brazil, etc.).  2014 forecasts are 4.9% for Emerging and Developing and 3.6% for Advanced Economies.  However, advanced economies are expected to increase their growth faster year over year.  Normalization of monetary policy and expected increases in interest rates may be playing a role in the decreased growth forecasts for countries like China and India.  Many central banks in the advanced economies (US, Eurozone and Japan) have been pumping money into their economies since 2008, which has led to increased monetary inflows to developing economies which ultimately has translated to higher economic growth.

Figure 1: 2014 GDP Growth Forecasts - Heat Map

Source: International Monetary Fund, World Economic Outlook, April 2014

Figure 2: 2014 GDP Growth Forecasts - Chart

Source: International Monetary Fund, World Economic Outlook, April 2014

While it’s encouraging to see growth increasing, especially here in the United States, growth is far from robust and has been sustained mainly by the role of central banks.  As we move towards the later half of the decade, the normalization of monetary policy - including the removal of Quantitative Easing and increasing interest rates - will have a major impact on GDP growth across the world.  In my next post, we’ll explore the connection between GDP growth and stock market returns.