Economic forecasting is known as “The Dismal Science”…and for good reason.
That’s because many economists look at a small slice of data and come up with bold forecasts. Sometimes they nail an economic forecast with dead-on accuracy, but they can also be profoundly wrong.#-ad_banner-#
The only way to get it right: Amass huge amounts of data to analyze and then recheck that data frequently.
That’s why the only economic forecasts I trust are generated by the International Monetary Fund (IMF). The organization is a collective effort on behalf of 188 countries around the world, and its hundreds of economists have deep ties into economic trends taking place worldwide.
Every quarter, the IMF‘s economists give a fresh look at the world economy, and a just-released report confirms that the global economy is likely to improve in 2013 and do even better in 2014.
Though they don’t look out beyond next year, a perkier global economy in the next eight quarters could set the stage for a virtuous cycle of growth into the second half of the decade, as trading partners start to boost demand for one another’s goods and services.
The 2012 pullback
One of the most notable aspects of the report is the assessment that the rate of growth in global economic output fell by nearly a full percentage point last year (from 3.9% in 2011 to 3.2% in 2012), yet few deep economic shocks occurred as a result.
European economies, which collectively account for more than a quarter of global economic activity, only dented but didn’t break the global economy. And this is why global markets are now breathing a sigh of relief.
The IMF expects eurozone economies to shrink further in the first half of 2013, and then start growing anew this summer and into 2014. It’s worth noting that the IMF repeatedly underestimated the depth of Europe’s woes in 2012, continually lowering its outlook as the year progressed. So expectations of a mid-year upturn may be premature.
However, comments from European policy leaders have taken on a different tone recently.
European Central Bank
President Mario Draghi recently noted that Europe is now benefiting from a “positive contagion.” Indeed, the Purchasing Manager’s Index for the eurozone rose 47.2 in December 2012 to 48.2 in January (and would need to rise above 50 to signal an economic expansion).
This is one reason why my colleague Elliott Gue, author of High-Yield International
, says investors should be thinking about European investments
before that region is back in growth mode.
[See also: A 5% Yield
From One of The World’s Most Recognizable Brands]
have already seen their lows and are beginning to rally in anticipation of a return to growth in 2013. If history is any guide, the gains are likely to be significant over the coming years as the cycle turns higher again,” he wrote in the January issue
of the advisory.
Remember the BRICs?
The IMF report also highlights another important economic trend investors may be missing as they focus on the U.S. and European economies. The world’s four largest emerging economies — Brazil, Russia, India and China — collectively stumbled a bit in 2012, but are poised for growth in the next two years.
Here’s what the IMF foresees…
If you haven’t invested in emerging markets
yet, then now is a fine time to get started.
These and other emerging economies appear poised for relatively stronger growth than will
be seen in advanced economies for the foreseeable future.
All eyes on the United States
Of course, there’s the old adage that “when the U.S. economy sneezes, the world catches a cold.” Yet it’s pretty clear we may be on the cusp of a virtuous global cycle in which the U.S. economy benefits from higher trade with key partners. These partners will also benefit from increased U.S. demand.
The IMF says the U.S. economic growth rate will actually dip, from 2.3% in 2012 to 2% in 2013, before hitting about 3% in 2014. Notably, many U.S. economists anticipate our economy will grow at a firmer pace this year, especially in the second half of 2013. The IMF still says the global economy has yet to land on solid ground, especially with several economic land mines still in place in Europe and the United States. But “If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected.”
The best and the worst
Which country is expected to have the toughest year ahead? The IMF says the Spanish economy will shrink by 1.5% in 2013 before expanding about 1% in 2014.
The fastest-growing region: Asia, which is expected to grow roughly 7%, thanks to China’s impressive 8% forecasted growth. (I recently looked at China’s economy, which you can read about here)
Sub-Saharan African economies should continue their impressive recent gains, with the region’s economies growing nearly 6% in 2013 and 2014, according to the IMF. Latin American economies are expected to grow at a more modest pace between 3.5-4%, but that region is well-positioned for impressive (relative) long-term growth as well.
Lastly, the IMF says oil prices will fall a bit in 2013 and 2014, which helps explain why it says the global inflation
will remain in check.
Risks to Consider: The IMF remains concerned about Europe and the United States, which collectively account for more than half of global economic output. The organization is particularly concerned that Washington will come up with a solution for the budget mess that could create too much of a drag on the U.S. economy. Right now, the odds of a solid long-term fix seems remote in 2013, so that IMF concern may be moot.
Action to Take –>
Barring any unforeseen impediments, the global economy may prove increasingly resilient and robust in coming years. That makes this a good time to analyze companies that are in deeply cyclical industries. The construction industry is a great example, and companies like crane maker Manitowoc (NYSE: MTW)
or aerial lift firm Terex (NYSE: TEX)
typically see a sharp and steady rise in sales and profits whenever the global economy strengthens. Investors may prefer to take the exchange-traded fund
route, so the Materials Select Sector SPDR (NYSE: XLB)
is a popular choice, trading roughly 8 million shares
The business trends in cyclical industries, including the stocks I just mentioned, may look somewhat tepid during the next few quarters, but the IMF report points to a more impressive economic path as we move towards mid-decade.