IMF Growth Projections and the Dollar

April 21, 2010

The evolution of quarterly growth projections by the IMF provide a useful gauge for charting shifting sentiment for different regions of the world economy.  New GDP growth forecasts for 2010 are compared below to estimates released by the IMF three months ago and in October, July and April of last year.  The oldest set of projections shown in the right-most column were released almost exactly a year ago on April 23, 2009.  Since then, the dollar on net has depreciated by 1.9% against the euro, 5.2% relative to the yen, and 5.5% against sterling.

GDP, % 04/10 01/10 10/09 07/09 04/09
World 4.2% 3.9 3.1 2.5 1.9
Advanced 2.3% 2.1 1.3 0.6 0.0
Emerging 6.3% 6.0 5.1 4.7 4.0
U.S. 3.1% 2.7 1.5 0.8 0.0
Euroland 1.0% 1.0 0.3 -0.3 -0.4
Japan 1.9% 1.7 1.7 1.7 0.5
U.K. 1.3% 1.3   0.9 0.2 -0.4

The IMF staff is considerably more optimistic about economic growth for all regions this year than it was a year ago.  Identical upward revisions of 2.3 percentage points (ppts) have been made for the growth of aggregated GDP of advanced economies from zero to 2.3% and for all developing and emerging nations from 4.0% to 6.3%.  However, among key advanced economies, projected U.S. growth was revised up 3.1 ppts compared to upward revisions of 1.7 ppts for Britain and 1.4 ppts for both the euro area and Japan.

Estimates of growth in 2011 were introduced six months ago in the October 2009 issue of the IMF World Economic Outlook.  At that time, a global growth rate of 4.2% was assumed, and today’s new report penciled in a rate of 4.3% in 2011.  U.S. growth next year is now put at 2.6% compared to 2.8% assumed last October.  Euro area growth in 2011 has been bumped up to 1.5% from 1.3% in last October’s issue, while Japanese growth next year is now projected at 2.0%, 0.4 ppts less than assumed last October.  This being only April, 2011 remains fairly far away, so any preconceptions about economic activity then carry a significant margin of error and so should not influence investor behavior anywhere near to presumptions about the current year.

The comparatively big improvement in U.S. economic growth prospects for 2010 constitutes for some analysts a huge fundamental economic advantage for the dollar.  Such implies that the Fed will begin raising interest rates sooner than the European Central Bank or the Bank of Japan.  Better U.S. growth prospects and the likelihood of a nearer-term onset to rising central bank rates in the United States are in fact already reflected in long-term rate spreads.  The ten-year Treasury versus German bund and Japanese JGB differentials are 97 and 95 basis points wider now than on April 23, 2009.  And yet it was noted at the outset of this post that the dollar despite Euroland’s debt crisis, Britain’s fiscal mess, and the return of Japanese deflation is weaker now than a year ago against the euro, pound, and yen.  What gives?

Loyal readers of Currency Thoughts should not be surprised by this paradox.  One of the most startling observations in my 35 years as a close observer of the dollar is a chronic tendency to under-perform the standard suggested by relative growth and interest rate comparisons.  This intangible drag explains in part why the dollar could buy 4 marks and 360 yen in 1968 but only 1.46 marks (synthetically speaking) and 93.2 yen now, or why the dollar lost roughly 13% against the mark and 9% against the yen in the 12 months to end-January 1995 in spite of a doubling of the federal funds rate to 6% in that span of twelve months.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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