Does growth forecast cut by IMF mean recession?

  • By Harrison Cole

  • February 14, 2019
  • 12:48 am BST

Although much of the appeal of contract for difference trades lies in the fact that they are best suited to fast-moving markets, overall macro-economic trends and developments are still of interest and importance to CFD investors. So much emphasis is put on the different strategies that can be used to try and get an edge on the markets that often the small details can outweigh the large. However, when talk turns to bull markets ending and bear markets beginning and even worse whole economies going into recession, attention must turn to the bigger picture.

Of course, using a news strategy is an accepted and established method of choosing markets for CFD trades and knowing what position to take and when the time is right to do so. With major data sets emerging and international institutions such as The International Monetary Fund (IMF) giving warnings about global growth, even the most short-term oriented day trader should take note.

Growth forecast

The IMF cut its global economic growth forecast in January, making it the second time it has done so in the last three months. Trade tensions between Washington and Beijing, and European economic problems of various sorts were cited as the main reasons. The IMF’s actual figures model the world economy to grow at a rate of 3.5% over this year and then 3.6% in 2020. This represents a drop of 0.2% and 0.1% respectively from the previous forecasts, which were made when figures were published in the last regular World Economic Update that came out in November 2018.

It isn’t just the IMF that thinks that a slowdown is likely, as both the Bank of England (BoE) and the European Commission have cut their own growth forecasts too. Taken together, the gloomy outlook from major international financial players led to the benchmark German bund yield fall to under 10 basis points, its lowest for two years. In contrast, the US dollar index hit a six-week high as the greenback grew in estimation as a ‘safe haven’.

These announcements and subsequent market movements are perfect examples of the way that CFD traders can use a strategy based on extrapolating data from news stories and headlines, but the process also shows that an approach based on short-term technical analysis can sometimes be overtaken by macro events.

Trade war effects

China’s economy is expected to see a significant slowdown this year and it is a testament to its relatively new-found importance on the world economic stage that this will affect other markets too. China had its weakest advance in ten years during 2018, and the ongoing trade war with the US still sees no firm sign of reaching an end.

However, Bank of America Merrill Lynch analysts recently pointed out that US companies don’t seem to have been negatively impacted to too great a degree. Discussing the latest round of US earnings reports, BAML noted: “Of the 55 companies citing China trends on earnings calls, nearly half have been positive, while slightly less than half have been negative (the rest mixed).”

“Just 43 companies overall have mentioned trade/tariffs, which could suggest uncertainty plus the fact that many already highlighted expected impacts (or lack thereof) in 3Q. About half of the mentions (around 10% of reported companies) cited a negative impact, vs the other half citing limited/no impact or managing any impact through pricing or supply chain shifts”, BAML continued.

Elsewhere earnings season has had a different spin. In Japan, third-quarter earnings season reports so far suggest that profits will fall by 2.6%. This is the biggest decrease since the tragic events following the Fukushima earthquake and tsunami in 2011 when almost 16,000 people lost their lives and an estimated $235 billion was wiped out of the economy. In contrast, European corporate earnings are expected to rise, but this is in part due to them starting from a much lower base level.

Recession risk

When growth reverses, the risk of recession increases and some analysts say that the current condition in the US put that threat at its highest level for three years. With the S&P 500 profits looking likely to have an overall fall in 2019’s first quarter according to Refinitiv data, a potential earnings recession for American companies would pile pressure on top of a global economic growth slowdown.

An earnings recession is defined as being a period of two consecutive quarters when profits decline, and the last time this happened in the US was 2016. The figures can be confusing though, especially for CFD traders whose aim is to spot short-term price fluctuations rather than predict long term asset value movements. For instance, if current first quarter estimates for 2019 are correct, it doesn’t take away from the fact that the S&P 500 has actually seen a gain of more than 8% so far this year.

This obviously suggests that investors, at least in the US, are less concerned about negative earnings figures and global growth predictions than they otherwise might be. One of the reasons for this might be the Federal Reserve continuing to stress its “patience” on future rate hikes, along with a willingness to believe that the longest bull market in history still has some steam left in it.

CFD implication

For CFD traders, an unsure environment and volatility are actually positive factors to some degree. However, if a real recession were to come to pass and things went into free fall, it makes it much harder to find opportunities to take positions that have potential value in short-term time frames. However, forex markets will always continue to provide plenty of ways to take advantage of fast-moving price fluctuations, and if the established economic order does crash again, crypto is still waiting in the wings to take advantage of the chaos that would ensue.