Talk of ‘melt-up’ may be premature as risks remain

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Talk of ‘melt-up’ may be premature as risks remain

Analysis


Warning: former IMF mission chief Ashoka Mody says its forecasts are frequently wrong because it ‘misses the big picture’
Warning: former IMF mission chief Ashoka Mody says its forecasts are frequently wrong because it ‘misses the big picture’

When Larry Fink, who heads US investment company Blackrock, told the world last week there was more a chance of a “melt-up” in stock markets, he might as well have been talking about the prospects for global economic growth as fears of a recession seem to be disappearing in the rear view mirror.

First-quarter economic growth data on Friday from the US may well add fuel to that view after bumper economic growth in China and a surge in retail sales in the United States last week.

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Even the warnings from the International Monetary Fund (IMF) meetings in Washington this month were accompanied by a set of growth forecasts that were anything but gloomy.

According to the IMF, global growth is set to be a not-too-shabby 3.3pc this year.

All well and good, although IMF forecasts do need to be taken with a pinch of salt, as they tend to emphasise the optimistic view. In October 2008, the IMF predicted an economic expansion for 2009 for both the US and Japan.

Instead, the world’s largest economy contracted by nearly three percentage points and Japan’s economy shrank by 5.4pc, its worst annual performance since World War II.

While it is true that sentiment has started to turn around, it is way too early to start the celebrations. Risks remain elevated, especially in Europe – which is the weakest link in the global economy – thanks to rapidly-slowing growth in Germany, the risks of Brexit and of an Italian debt crisis.

Germany’s own forecast shows that the largest economy in the eurozone, fully a third of its economic output, is set to grow just 0.5pc this year.

That’s the second downgrade this year and as recently as December the country’s growth was pegged at 1.8pc.

One of the pessimists is Ashoka Mody, the outspoken mission chief of the IMF’s operation in Dublin at the height of the financial crisis.

He is quite blunt in his assessment of his former employer’s poor track record.

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“The IMF keeps getting forecasts wrong because it misses the big picture,” he wrote last Friday.

Mr Mody warns in an article on the Project Syndicate website that the world, especially exporting Europe, has become too dependent on China and says that the recent data is yet another “sugar high” that will soon evaporate.

“For the world economy, the continuing problem is the short-lived nature of Chinese stimulus.

“The OECD has already warned that the latest stimulus will drive up the worryingly high volume of corporate debt, and that over-indebted local governments will borrow more to finance wasteful infrastructure.”

Not all of the recent economic data has been as reassuring as the Chinese GDP and US retail sales.

Purchasing Manager surveys, which give a close to real-time look at the economy, show the US composite PMI fell from 54.6 in March to a 31-month low of 52.8 in April, which consultancy Capital Economics said showed the world’s biggest economy was losing steam even faster than it had expected.

In Europe, the German and French PMIs came in better than expected, but they are still lower than levels seen in the fourth quarter and the overall eurozone reading fell, suggesting more bad news in the periphery.

For Mr Mody, the risk lies in Italy where the economy simply cannot generate enough growth to clamber out of recession and a debt to GDP ratio of 130pc.

“Tremors along the Italian fault line will spread quickly to France, which has only slightly better indicators and also little scope for an effective policy response to a serious downturn,” Mr Mody wrote.

Irish Independent

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