IMF Downgrades Global Growth Outlook Citing Risks Continue To Loom Large…


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IMF UPDATES WORLD ECONOMIC OUTLOOK: Downside risk to global economy continues to loom large:

  • Maintains global 2012 GDP growth forecast at +3.5% Apr view
  • Cuts global 2013 GDP growth forecast to 3.9% from +4.1% Apr view


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  • Cuts China 2012 GDP view to 8.0% from +8.2% Apr view
  • Maintains Euro zone 2012 GDP view at -0.3% Apr view
  • Raises Germany GDP growth to +1.0% from 0.6% prior
  • Raises Spain 2012 GDP view to-1.4%o % v -1.8% Apr view
  • Cuts UK 2012 GDP view to +0.2% from +0.8% Apr view
  • Cuts US 2012 GDP to 2.0% from +2.1% Apr view
  • Raises Japan 2012 GDP view to +2.4% v +2.0% Apr view
  • Cuts Brazil 2012 GDP view to 2.5% from 3.1% prior
  • Cuts India 2012 GDP growth to 6.1% from 6.8% prior


  • Cuts China 2013 GDP view to 8.5% from +8.8% Apr view
  • Cuts India 2013 GDP view to 6.5% from 7.3% prior
  • Cuts Euro Zone 2013 GDP view to 0.7% from +0.9% Apr view
  • Cuts Germany 2013 GDP at 1.4% from 1.5% prior
  • Cuts Spain 2012 GDP view to -0.7%o % v +0.1% Apr view
  • Cuts UK 2013 GDP to 1.4% from +2.0% Apr view
  • Cuts US 2013 GDP to 2.3% from +2.4% Apr view
  • Cuts Japan 2013 GDP view to +1.5% v +1.7% Apr view
  • Raises Brazil 2013 GDP view to 4.6% from 4.1% prior


  • Room for ECB to further cut monertary policy
  • Financial stress in Euro Zone ‘ratched up’ with periphery at center of the storm
  • Most immediate risk is delayed or insufficient EU policy action – EU will remain precarious until action is taken
  • Emerging economies have room for monetary easing to respond to economic shocks; fiscal stimulus should be the line of defense
  • Sees risk of hard landing in China 
  • US economy seeing underlying loss of momentum

IMF’s Blanchard:

  • Global economic recovery continues to be weak, US growth will make a serious dent in its unemployment situation.
  • Italian and Spain banks should be recapitalized without using soverign funding. Expects to see negative GDP in many peripheral euro zone nations this year and probably next year too.
  • Depite ECB’s nearly zero policy rates, borrowing costs are still very high in peripheral euro zone nations.
  • Peripheral euro zone member states must improve competitiveness.
  • China is prepared to enact policies to drive domestic demand.
  • Economic slowdown in emerging nations varies from country to country.
  • Slowdown in Brazil is due to credit tightening, will be able to sustain high growth in 2013.
  • US Fiscal Cliff could cut 1.5 points of advanced economic GDP

How to interpret these headlines?

Market has been expecting downgrade this week after IMF Chief Lagarde commented on the global growth outlook last week… IMF continues to warn U.S., Europe, and China on potential adverse scenarios, while upgrades Japan’s GDP outlook for 2012.  I think we’ll probably see the fundamental markets for the rest of the year behave similarly to this report, mostly driven by risk aversion scenarios.  JPY will probably remain strong as BOJ is unwilling to increase their balance sheet, and when you consider that most traders just want safety rather than return in a weak global economic environment, Yen is probably the best choice.

I would be very careful on selling JPY moving forward, except against USD as both USD and JPY are considered as safe-haven currencies; at any rate, USD and JPY are probably going to remain bullish throughout.

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About Henry Liu

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