Impact of a higher GDP forecast

Fri, 9 Jul Pre-Open

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The International Monetary Fund (IMF) upgraded its 2010 global growth forecast yesterday. It raised its 2010 global GDP forecast to 4.6% from 4.2% earlier. Further, it kept its 2011 view for global GDP growth unchanged at 4.3%. Robust expansion in Asia and renewed US private demand were some of the reasons cited for doing so. A double-dip world recession, it feels, is highly unlikely to happen.

But even as the IMF got more optimistic about the global economy and its recovery, big question marks continue to loom over like black clouds in the sky.

For one, the euro zone's sovereign debt crisis poses a big risk to the recovery. Uncertainty about bank regulation in developed countries has added to investor anxiety. Governments of most major developed countries find themselves loaded with debt. Then there is also the persistent and nagging weakness in the US housing and labour markets. If that isn't enough, fears that a bubble is forming in the Chinese real estate market are rampant. A bursting of this bubble, many point out, could be devastating for the Chinese banking system and for commodity prices.

As far as the IMF is concerned, it remains steadfast in its forecasts. It feels that even assuming shocks to the global financial system resulting from Europe's debt problems are as severe as those experienced in the wake of Lehman Brothers' failure in 2008, world GDP growth in 2011 would be reduced by just 1.5%.

So at the end of the day, what does this upgrade in GDP growth forecast mean for you as an investor? Not much actually. For one, economic forecasts remain as unreliable as ever. Such forecasts are good to make, talk about and print as part of a news story. It does not really cost the forecaster much if his forecasts turn out to be wrong, and they often do. But if they are really reliable enough to serve as the basis of investing one's hard earned money is something we remain circumspect about.

Second, broad macroeconomic forecasts seldom tell you anything about the extent to which they will affect each individual business. Let alone telling you anything about the value their stocks will create for you in the years to come. That translation from a broad economic call to a particular stock's price is an extremely imperfect and subjective process.

When making investments, it is perhaps a better idea to try and segregate what is 'important and knowable' from what is 'important but unknowable'. To concentrate on the former while making decisions would yield a better long term result.