The IMF’s 19 July economic update contained yet another downward revision to their global growth estimates: now running at 3.1 percent for 2016 and 3.4 percent for 2017. The report noted “The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies.” The growth forecasts for the UK saw a modest downgrade to 1.7 percent in 2016 but the 2017 estimate was slashed by 0.9 percent to 1.3 percent.
Today’s UK PMI data corroborated the IMF’s gloomier outlook with the UK PMI composite index falling to 47.7 in July from 54.2 in June to trade at its lowest level since April 2009. The services component was particularly weak. The IMF has also reduced its German growth estimates by 0.4 percent to 1.2 percent in 2017, although the German PMI data remained strong with the composite index rising to 55.3 in July from 54.4 in June. Although we note the July ZEW survey released earlier in the week painted a more negative picture for the German economy falling to its lowest level since 2012 and yesterday’s ECB statement noted “the risks to the euro area growth outlook remain tilted to the downside.”
We see not only a ‘Brexit’ impediment to global growth but also powerful structural constraints: as we have written before demographic trends and secular stagnation point to a slower growth paradigm. Elevated global debt levels compound this; in many cases prompting austerity driven policy and the rise in inequality promoting a rise in ‘populist politics’. With these trends it comes as little surprise that interest rates are at such low or negative levels and that inflation remains benign. This makes yields in excess of 4% available in investment grade bonds in creditor nations look an attractive place to be positioned.
On a more positive note, the one area where the IMF’s growth estimates were upwardly revised was Russia: 2016 growth was revised up by 0.6 percent to -1.2 percent and the 2017 growth estimate was increased by 0.2 percent to 1 percent. Low oil prices and sanctions remain constraining factors but it does nevertheless look like the worst has passed. Sanctions, despite growing questions about their effectiveness, remain in place as the implementation of the Minsk II agreement continues to drag on. Sergey Lavrov, the Russian Foreign Minister, notes that in order for border control to be returned to the Ukraine certain clauses of the Minsk II agreement still need to be fulfilled by them: “we have explained to them many times that without an amnesty and a law on the special status, which will really guarantee additional rights to the (self-proclaimed) territories and so long as these rights are not enshrined permanently in Ukraine’s constitution, it is hard to believe that Donetsk and Lugansk will agree to implement in advance what is supposed to wind up the political process under the Minsk Accords rather than to be a preliminary condition."