The World Bank has embraced the early year optimism on the outlook for the global economy. In their latest quarterly economic report, the World Bank forecasts a moderate acceleration in global economic growth, up from an estimated post-crisis low of 2.3% in 2016 to 2.7% in 2017, as “obstacles to activity recede among emerging market and developing economy commodity exporters”.
Commenting on the report World Bank Group President Jim Yong Kim said “After years of disappointing global growth, we are encouraged to see stronger economic prospects on the horizon”.
Of course, this has been a familiar occurrence over the last five years as the turn of the year always brings more optimistic forecasts for economic growth. However, the issue has been that these forecasts have consistently failed to materialise, as economic growth has underwhelmed.
Hence why the world’s major central banks have kept monetary policy ultra-loose, with many of the key interest rates still at record lows. As a result, while economic growth has disappointed over the years, asset prices – stocks, bonds, property – have benefited from lower discount rates.
The World Bank do caveat their outlook, noting that “downside risks to global growth include increasing policy uncertainty in major advanced economies and some emerging market and developing economies (EMDEs), financial market disruptions, and weakening potential growth”.
On the other hand they have also jumped on board with the fiscal stimulus theme which has gained traction since the election of Donald Trump as the next US President. “Fiscal stimulus in key major economies—in particular, the United States—could lead to stronger-than-expected activity in the near term and thus represent a substantial upside risk to the outlook.”
Almost everyone would agree that underlying economic growth does matter, but in the short run financial market participants are driven by many different factors. In recent years, the dominant factor has been central bank policy. However, over the long term the market cannot continue to move ahead of the fundamentals, just as trees cannot grow to the sky.
Therefore, at some point one would fear that missed expectations, lower than forecasted economic growth, will have some repercussions on asset prices. For now, the markets have been okay with this annual dance ritual of optimistic predictions coming into a new year with downgrades as the year has played out.