Janine T. from Norfolk, VA asks: Hello Mitch, I saw an article last week where the head of the International Monetary Fund said we should expect the weakest global growth in something like 30+ years. What do you make of this forecast?
Mitch’s Response:
Thank you for writing. Some readers may have missed the IMF forecast you’re referencing, so I’ll start by laying that out.
Last week, the IMF’s managing director, Kristalina Georgieva, forecast that global GDP growth would hover around 3% for the next five years, which would be the weakest medium-term outlook since 1990 (as you reference in your question).1
The rationale behind the glum forecast was largely that higher interest rates across the developed world would raise borrowing costs globally for households and businesses, and particularly constrain economic growth in developing countries. Ms. Georgieva forecast that 90% of advanced economies would experience negative GDP growth sometime in 2023.2
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The IMF’s forecast for weak global growth accompanied a similar outlook from the World Bank, which warned recently that global growth was heading into a “lost decade.” The World Bank cited structural challenges – weak investment, slowing productivity, and demographics – that are being made worse by the war in Ukraine and high inflation. In a statement, they said “it will take a herculean collective policy effort to restore growth in the next decade to the average of the previous one.” By World Bank estimates, the potential growth will shrink to 2.2% a year from 2022 to 2030.
So, what to make of these forecasts?
For one, I think it’s important to point out that the last time the IMF forecasted medium-term growth of 3% or less was in 1990. The next decade was of course one that featured historic productivity gains and wealth creation with the widespread adoption of the internet, and also strong GDP growth. 1990 was not a great time to be glum about the economy, in other words.
The example of 1990 is also a good reminder that it doesn’t make very much sense, in my view, to try and forecast growth beyond a year or two max into the future. There’s simply no way to know what kind of innovation or productivity breakthrough could come along and reshape labor markets and the economy, just as there’s no way to forecast if a geopolitical event will hamstring trade, commodity prices, or any other number of economic fundamentals.
When I learn about new IMF or World Bank projections, I usually use them to gauge where consensus is in the marketplace – whether that’s positive, negative, or somewhere in between. Then the next question to ask is whether you think the U.S. and global economy is more likely to surprise to the upside or downside in the next year, though I do not see much value in forecasting beyond that. When I think about these current forecasts in the context of 2023 and early 2024, my basic thinking is that they could be right in forecasting a mild downturn or wrong in that the economy surprises to the upside. And from an investment perspective, I think that either means no surprise or a positive surprise for stocks.
While investing in times like these can be challenging, I would say it is key not to let your emotions get the best of you and to stay invested. Since 1926, investors who remained in the market over the long term came out ahead 99% of the time.4
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Disclosure