The International Monetary Fund - World Economic Outlook

By: Ian_R_Campbell

Yesterday the International Monetary Fund issued both its 'World Economic Update' and its 'Global Financial Stability Report'. If you read the short Executive Summaries at the beginning of each, you effectively will have read them. That will take you less than 2 minutes in total, and you ought to take the time to do it - see links following this commentary.

Simply put, ask a healthy 35-year-old man to assume:

• he can high jump over a 3-foot high fence. He almost certainly will be prepared to assume he can do that;

• he can high jump over a 5-foot high fence. Depending on his physical condition and athleticism, he might or might not be prepared to assume he can do that; and,

• he can high jump over a 100-foot high fence. If he tells you that he is prepared to assume he can to that, you better start questioning his other assumptions.

All in aid of yesterday's International Monetary Fund updates. The IMF in its World Economic Outlook Update says:

• "the past three months have shown signs of weakness in the global recovery" (rephrased);

• subject to two assumptions, developments in the past three months will "only result in a minor setback to the global outlook, with global growth at 3.5% in 2012 and 3.9% in 2013, marginally lower than (our) April 2012 (outlook)". The two assumptions made by the IMF when reaching that conclusion are:

  • "there will be sufficient policy action to allow financial conditions in the euro area periphery to ease gradually", and

  • "recent policy easing in emerging market economies will gain traction".

As I see things, these may not be 'jump over a 100 foot high fence assumptions', but given all the attendant circumstances they are certainly 'jump over a much higher than 5 foot high fence assumptions'. As a result, I do not place much weight on yesterday's IMF World Economic Outlook.

The IMF's Global Financial Stability Report begins by saying "risks to financial stability have increased since (our) April, 2012 report", and focuses on what the IMF sees as:

• the importance of "timely implementation of the recently agreed measures" announced two weeks ago at the European Union leaders' summit meeting then held in Brussels. The IMF Report makes no mention of that agreement being 'conditional', and by chance the IMF Report was released on the same day the German Constitutional Court announced it was postponing its decision on the constitutionality of the European Stability Mechanism until mid-September; and,

• uncertain U.S. fiscal outlook and federal debt ceiling issues that "present a latent risk to financial stability".

An underlying dependence on the European leaders summit agreement being implemented as 'conditionally agreed' and in a 'timely manner' both seem questionable to me.

Because of the importance of all of this, I strongly suggest that if you read this commentary that you read both IMF Executive Summaries - then reach your own conclusions.

Concurrently, in yet another IMF statement, the IMF said that it was now forecasting improved fiscal deficits for Greece, but higher public debt:GDP numbers for this year and 2013 for Greece. This makes sense if the Greek government succeeds in enforcing meaningful austerity measures immediately if not sooner, and in circumstances of what appears to be Greece's continuing drop in GDP.

I generally pay close attention to what is said by Christine Lagarde, the IMF Managing Director. While I understand why the IMF can't come out and say "nothing is happening fast, and as a result the world economic situation, particularly that of the Eurozone and the United States is likely to continue to deteriorate", I am less impressed with yesterday's World Economic Update and Global Financial Stability Report than I am with the typical statements made by Ms. Lagarde.

Ian R. Campbell, FCA, FCBV, is a recognized Canadian business valuation authority who shares his perspective about the economy, mining and the oil & gas industry on each trading day. Ian is also the founder of Stock Research Portal, which provides stock market data, analysis and research on over 1,600 Mining and Oil & Gas Companies listed on the Toronto and Venture Exchanges. Ian can be contacted at icampbell@srddi.com

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