IMF keeps global growth forecast at 3.9%, but warns of trade war threats

Outlook:

We get the flash PMIs for manufacturing, services and the composite this morning. Japan had a small rise and the eurozone had the same as in March, so no affirmation of any slowdown. For once the IMF statement, released Saturday, is hitting the nail on the head. The IMF left its global growth forecast at the same 3.9% as in January, but warned of threats to growth from central bank policy tightening, a slowdown in China, and trade war.

The IMF is also worried about inflation in the US arising from fiscal stimulus at a time when unemployment is at a record low. Where the rubber meets the road is the record high level of both public and private debt to $164 trillion. “A spike in interest rates would test the ability of borrowers to refinance all that debt.” See the chart.

In an amusing side note, TreasSec Mnuchin responded to criticism of the US for going about fixing the trade deficit the wrong way. He said “global trade imbalances are roughly a third larger than they were in the 1980s and 1990s, and show no signs of narrowing,” according to Bloomberg. Countries with surpluses need to do their share and the IMF should “step up to the plate on this issue, providing a more robust voice and consistently noting when members maintain macroeconomic, foreign exchange, and trade policies that facilitate unfair competitive advantage or lead to imbalanced growth.”

Oh, how we hate to say it, but Mnuchin is right. That is IMF’s job description. Mnuchin is probably visiting China soon and no one is better equipped to tell the Chinese that the majority of US policy makers and economists believe in free trade, but Trump is running the show now and China will serve its self-interest by giving in as much as it can.

We have worries about the potential for a Shock to upset the global apple cast, specifically oil-induced inflation, but right now the bigger risk is dollar bears realizing they are betting the wrong way. A position reversal would cause the dollar to overshoot to the upside and trigger new Trumpian dollar-negative statements. Rinse and repeat.

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