The International Monetary Fund (IMF) recently offered what it calls “a gloomier picture” of the global economy compared to just a few months ago, largely due to two issues: the ongoing Euro area crisisalong with the rapidly-approaching “fiscal cliff” faced by the U.S.
“Failure to act on either issue would make growth prospects far worse,” noted IMF Chief Economist Olivier Blanchard. “Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses.”
[Blanchard wasn’t much more positive concerning his forecast for the global economy back in July, either, as you can see in the video clip below.]
The group reported in its latest World Economic Outlook – unveiled in Tokyo this week ahead of the IMF-World Bank annual meetings – that “advanced” economies (i.e. Europe, the U.S., and Japan) are projected to grow by only 1.3% this year, compared with 1.6% last year and 3% in 2010, with public spending cutbacks and the still-weak financial system weighing on prospects.
Furthermore, growth in emerging market and developing economies is markedly down compared to forecasts back in July and April, dropping to 5.3%, against 6.2% last year. Leading emerging markets such as China, India, Russia, and Brazil will all see slower growth as well, the IMF said, with growth in world trade volumes projected to slump to 3.2% this year from 5.8% last year and 12.6% in 2010.
Now, not everyone thinks the IMF makes an accurate read of the global economic tea leaves. Take Dennis Gartman, publisher of the investment guide The Gartman Letter, for example: He said in a recent interview that he doesn’t take into account anything the IMF puts out, instead relying on what actual global companies (specifically pointing to FedEx Corp.) are reporting in terms of worldwide economic trends.
However, freight-related data seems to mirror what the IMF is forecasting in terms of global economic sluggishness. Indeed, several analysts are concerning about the earnings outlook for the transportation sector – which is where FedEx lives and breathes – and that’s leading to a growing sense of “uneasiness” where freight volumes are concerned.
Though unemployment dropped to 7.8% in September (a very welcome development), that dip may be masking other more negative developments within the labor market.
The CBIZ Small Business Employment Index (SBEI), for one – a barometer for hiring trends among companies with 300 or fewer employees – decreased by 2.55% during September, following an increase of 1.15% in August; the third largest statistical decline for this metric, noted Philip Noftsinger, business unit president for CBIZ Payroll Services.
The National Federation of Independent Business (NFIB) also reported some worrisome trends, calling September “another month of low expectations and pessimism for the small-business community” as its NFIB Small Business Optimism Index lost 0.1 points, falling to 92.8.
The group said its optimism index fell due to what it dubbed “deteriorating labor market indicators,” with job creation plans plunging 6 points, job openings falling one point and more firms reporting decreases in employment than those reporting increases in employment.
The group’s poll found that weak sales continue to be “an albatross” for the small-business community, with the net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months unchanged at a negative 13%, cementing the 17 point decline since April and affirming weak GDP growth for the second quarter.
Some 21% still cite weak sales as their top business problem—historically high, but down from the record 34 percent reached in March 2010, NFIB reported.
Small-business owners are still in “maintenance mode” when it comes to investing, the group added, with the frequency of reported capital outlays over the past six months falling 4 points to 51%. Of those making expenditures, 34% reported spending on new equipment (down 7 points from the previous month), 16% acquired vehicles (down 5 points), and 14% improved or expanded facilities (unchanged).
Job creation plans showed that small-business owners created fewer jobs in September than in the two previous months, NFIB said, with only 10% planning to increase employment at their firm (down 3 points), and 11% planning reductions (up 2 points).
Seasonally adjusted, the net percent of small business owners planning to create new jobs fell 6 points to 4% – a historically weak reading, especially in a recovery. Essentially, hiring is keeping up with population growth, but not exceeding it, NFIB noted.
Ernst & Young's latest Capital Confidence Barometer also discerned an increase in gloominess with larger companies. Its survey of more than 1,500 senior executives in 41 countries around the world found that 76% believe the global economy shows no signs of improvement, with U.S. respondents saying a recovery in the global economy is at least one to two years away or more.
[The IMF also expressed concerns back in July on the financial trends it began seeing, as related in the video below.]
Against that backdrop of uncertainty, Ernst & Young found that companies increasingly are focused on strengthening balance sheets, reducing costs, improving efficiency and maintaining stability compared with six months ago – and while growth remains a top priority for U.S. companies for the foreseeable future, they are positioning themselves for a slow recovery with low or stagnant growth rates.
That means companies are increasing hoarding cash, rather than investing it – not a good trend where freight is concerned. Ernst & Young’s research found that there’s some $1.3 trillion in cash on US corporate balance sheets, with 70% of U.S. respondents to its survey believing that credit is either stable or improving, although this percentage is down from 80% in April.
Companies' intentions with regard to excess cash now more focused on deleveraging and returning cash to stakeholders (52%), with just 36% of respondents plan to deploy excess cash toward organic growth, compared with 44% in April.
With all of that said, let’s return to the IMF’s forecast and see what that organization thinks will happen economically speaking over the next several months:
- The global recovery will continue limp along in the major advanced economies, with growth remaining at a fairly healthy level in many emerging market and developing economies.
- In the U.S., growth will average 2.2% this year with real GDP projected to expand by about 1.5% during the second half of 2012, rising to 2.75% later in 2013. Weak household balance sheets and confidence, relatively tight financial conditions, and continued fiscal consolidation stand in the way of stronger growth.
- In Euro area, real GDP is projected to decline by 0.4% in 2012 overall—about ¾ percent (on an annualized basis) during the second half of 2012. With lower budget cuts and domestic and euro area–wide policies supporting a further improvement in financial conditions later in 2013, real GDP is projected to stay flat in the first half of next year and expand by about 1% in the second half of 2013.
- The “core” European economies (Germany, France, etc.) are expected to see low but positive growth throughout 2012–13. Most euro area “periphery” economies are likely to suffer a sharp contraction in 2012, constrained by tight fiscal policies and financial conditions, and to begin to recover only in 2013.
- In Japan, growth is projected at 2.2% in 2012. The pace of growth will diminish noticeably as post-earthquake reconstruction winds down. Real GDP is forecast to stagnate in the second half of 2012 and grow by about 1% in the first half of 2013. Thereafter, growth is expected to accelerate further.
- In Latin America, real GDP growth is projected to be about 3.25% for the second half of 2012. It is then expected to accelerate to 4.75% percent in the course of the second half of 2013. The projected acceleration is strong for Brazil because of targeted fiscal measures aimed at boosting demand in the near term and monetary policy easing, including policy rate cuts equivalent to 500 basis points since August 2011. The pace of activity elsewhere is not forecast to pick up appreciably.
- Fundamentals remain strong in many economies that have not suffered a financial crisis, notably in many emerging market and developing economies. In these economies, high employment growth and solid consumption should continue to propel demand and, together with macroeconomic policy easing, support healthy investment and growth. However, growth rates are not projected to return to pre-crisis levels.
There you have it – a gloomier set of tea leaves sprinkled here and there with some positive notes. Let’s just hope the positives begin to outweigh the negatives in the months ahead.