How should long-term investors interpret international economic organizations downgrading their economic forecasts? The International Monetary Fund (IMF) recently reduced its forecast for global gross domestic product growth by 0.2 percentage point to 3.0% for 2019 and by 0.1 percentage point to 3.4% for 2020.[i] The Organization for Economic Cooperation and Development (OECD) likewise lowered its official estimates, reducing its 2019 outlook by 0.3 percentage point to 2.9% and 2020 by 0.4 percentage point to 3.0%.[ii] But to Ken Fisher (Trades, Portfolio)—Fisher Investments founder and executive chairman—this is noise for investors. We agree. Reacting to such forecasts and revisions could easily be an error. For one, forecasts are opinions, not guaranteed outcomes. Second, even if either forecast proves correct, we don’t think it should be a problem for global stocks—just as we doubt revising forecasts higher would be massively bullish.
Projecting growth rates to the decimal point implies a great deal of math and precision. But upon deeper consideration, the endeavor seems grounded much more in opinion than science. Predicting global GDP growth involves numerous assumptions about each underlying country. Accuracy of the forecast hinges on all of the predicted events not only happening, but having the exact impact the forecaster expected. The notion that anyone could get all of this right for something as vast and varied as the global economy strikes us as exceedingly far-fetched.
The vast number of factors and assumptions required to predict growth in the entire global economy makes repeated accuracy unlikely. The OECD’s outlook presumes its estimate of headwinds from trade tensions persist. It also suggests manufacturing’s woes continue, weighing on labor markets, income and spending. It further references September’s spike in oil prices increasing uncertainty, but prices have since quickly retreated. Even if they rise anew, as Ken Fisher wrote in August, “this isn’t the 1970s.”[iii] As he showed, the world has abundant oil supply and is far more energy efficient than it was decades ago.
The IMF makes similar assumptions regarding oil prices, inflation and trade, among other variables. A lot of this relies on mathematical models, which reduce economies to math equations with a series of variables. Change one, run it through the model, and the result is a changed forecast. In our view, this invites trouble for a few reasons. Most models rely on historical data and long-term averages, which may or may not resemble the future. They also presume relationships that may or may not hold—markets and economies adapt to changing incentives. Regardless of how accurately they assess causal relationships, models can’t account for changes that might happen in the future. Finally, the underlying presumptions about whether variables like higher oil prices or lower interest rates are harmful or helpful may not square with reality, which is too complex to boil down to simple if-then relationships.
Inaccurate historical forecasts illustrate the point. In April 2008, the IMF expected 3.7% global growth that year and 3.8% for 2009. Yet GDP grew just 1.9% in 2008 and declined -1.7% in 2009.[iv] In April 2009, the IMF expected a lukewarm recovery in 2010—1.9% growth. That was far short of 2010’s actual 4.3% growth rate.[v] More recently, as late as October 2018, the IMF predicted global growth of 3.7% for the full year.[vi] Yet global GDP grew 3.0% in 2018.[vii] We don’t point this out to pick on them, but rather, to show the exercise’s general futility.
Even if their estimates are correct, rather than being something to fear, we think they present reasons for optimism. In this case, the OECD predicts Brexit potentially causes a UK recession in 2020 if a “no deal” exit occurs, which it envisions also “reducing growth in Europe considerably.” With regard to tariffs, it suggests they are “endangering future growth prospects.” There is no way to know if these views are too optimistic or pessimistic, but it is noteworthy that despite these supposedly major headwinds they still predict global GDP growth. This underscores our long-running opinion that these issues aren’t big or geographically sweeping enough to cause a global recession. Consider: As Ken Fisher (Trades, Portfolio) wrote in a recent "Independent" column published in Ireland, tariffs threatened or enacted total “just 0.3pc of our €78trn [$85.6 trillion] global GDP. Nowhere near large enough to render [global] recession…”[viii]
Ebbs and flows in growth rates are typical in any economic expansion—they don’t dictate stocks’ direction. Should this prove to be simply a slowdown and not a recession in the offing, we think that would positively surprise many investors. That is a bullish factor, in our view. Absolute growth rates matter much less than how economic and political drivers square with investors’ expectations.
In our view, there is another large reason these forecasts aren’t actionable for investors. Markets price in all widely known information, including opinions and forecasts such as these. This means that stock prices likely already reflect these expectations and the many, many other forecasts swirling throughout financial news. We don’t think any will be a material driver for markets. They may influence investors’ expectations to a degree, but that is about the extent of their impact.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] Source: IMF, as of 15/10/2019. World Economic Outlook, October 2019. Global real GDP forecast, 2019 – 2020. https://www.imf.org/en/Publications/WEO/Issues/2019/10/01/world-economic-outlook-october-2019.
[ii] Source: OECD, as of 26/9/2019. OECD Economic Outlook, Interim Report September 2019, OECD Publishing, Paris, https://doi.org/10.1787/37e06864-en.
[iii] “Why Oil Price Swings Won’t Burn America’s Economy or Your 401(k),” Ken Fisher (Trades, Portfolio), USA Today, August 25, 2019. https://www.usatoday.com/story/money/columnist/2019/08/25/dow-iran-threatens-oil-supply-but-it-wont-derail-bull-market/2060318001/
[iv] Source: The World Bank, as of 1/10/2019. Global annual percent change in real GDP, 2008 – 2009.
[v] Source: IMF and The World Bank, as of 10/7/2019. World Economic Outlook, April 2009. Global real GDP forecast, 2010. Global annual percent change in real GDP, 2010.
[vi] Source: IMF, as of 1/10/2019. World Economic Outlook, October 2018. Global real GDP forecast, 2018.
[vii] Source: The World Bank, as of 1/10/2019. Global annual percent change in real GDP, 2018.
[viii] “ Ken Fisher (Trades, Portfolio): ‘Why Fears Over Trump’s Tariff Battle Are Misplaced’,” Ken Fisher (Trades, Portfolio), Independent, October 10, 2019. https://www.independent.ie/business/world/ken-fisher-why-fears-over-trumps-tariff-battle-are-misplaced-38557386.html