Behind closed doors in a dark walnut-panelled boardroom, the Federal Open Market Committee meets again to change the course of economic history. Or not.
After their last meeting, the FOMC announced no interest rate rise. Mentioning that ‘global economic and financial developments continue to pose risks’. So, what will be the outcome of the current 2-day meeting?
The committee’s priority is the US economy of course, not the rest of the world per se. They are linked, yes, but the committee needs to decide what might be the effect globally of a rate hike, and to what extent that will impact the US (notwithstanding the fact that by some measures a rate rise is technically due).
Now exports account for only 14% of US GDP, unlike for example the euro zone where the figure is 26%. Although, the dollar’s rise has made US exports more expensive in the international marketplace, and that is a concern. Corporate profits are under pressure - a third of sales in S&P500 companies come from abroad.
Reduced corporate profits have led to a decline in investment, another component of GDP.
But a far more significant component of GDP in the US is consumer spending. And although the unemployment rate has fallen nicely, real wages growth has stagnated for many years. Even the dramatic fall in the price of oil has not fed through to consumer spending, which has slipped.
So we should not be surprised that the March projections for US 2016 GDP real growth were down 8% from those as recently as December 2015. 2.2% versus 2.4%. And the projected decline in GDP real growth is down to just 2.0% by 2018. See the table below, straight from the projections of the March FOMC minutes.
So what about global economic projections?
Last week the IMF released it’s updated World Economic Outlook (April 2016). Christine Lagarde (managing director) in her own words (BBC News ‘Hardtalk’ interview) said ‘We are on alert, not alarm.’
This is coming from a person whose unwritten job description is to not tell us when she’s really really worried. Kind of like the airline pilot whose job is remain calm in a crisis and never yell into the Tannoy “Oh my god, we’re going to crash..!”
The title of the report is telling: “Too Slow For Too Long”. The IMF April projection for global growth in 2016 is now 3.2%, down another 0.2% just from January.
”.. uncertainty has increased, and risks of weaker growth scenarios are becoming more tangible. The fragile conjuncture increases the urgency of a broad-based policy response to raise growth and manage vulnerabilities.”
Or to paraphrase in my own words, “Ooo err, somebody had better do something. And quickly.” The problem is that economic policymakers have little room to maneuver, and even less scope for responding to any unforseen shock.
All this might leave us with a nagging worry that the recent market rebound is just way too sentimental. And I’ve never been a fan of all that soppy stuff anyway.