Friday, July 25, 2014

IMF Cuts GDP Forecast for the US and China

The IMF is lowering its GDP forecast for both the US and China. The US first quarter was very bad and the IMF cited bad weather as the main reason. They believe GDP will pick up the rest of this year, but the bad first quarter caused them to lower their overall 2014 forecast. They also cut their forecast for China as well.

This will bear watching as any signs of further weakness will pressure the FED which continues to project that an improving economy will allow it to end its QE program and eventually raise interest rates. Jim Rickards and others (John Williams, Micheal Pento, Peter Schiff, Jim Rogers, Marc Faber, etc)  are on record saying they believe the FED is "tapering QE into weakness" and this will result in another US recession by early 2015.

If Rickards is right it will have signifigance because the FED will lose credibility with the markets and be forced to rethink its forecast and its policies. That could impact the US dollar and cause some loss of confidence in it. 

On the other hand, if the IMF and the FED forecasts are correct, the US dollar should not take a severe hit any time soon. Since the value of the US dollar is the biggest key we watch for here this whole topic is very relevant.

So far Rickards has been right and the IMF/FED were wrong. Will that hold up or reverse? Will the FED change its forecast and reverse course? What impact will slower growth in China have? We will keep watching it here the rest of the year to see how it turns out and if it has significant impact on the monetary system or not.

Note: Here is actual IMF report link.  Here is an excerpt from the report regarding the medium term outlook.

"Looking at the medium term, potential growth is forecast to average just above 2 percent for the next several years, significantly below the historic average growth rate. This downgrade reflects the effects of an aging population and more modest prospects for productivity growth. This makes it critical for the authorities to take immediate steps to raise productivity, encourage innovation, augment human and physical capital, and increase labor force participation. 

Moreover, recent growth has not been particularly inclusive, with the latest data pointing to almost 50 million Americans living in poverty (as shown by the Census Bureau’s supplemental poverty measure) and the official poverty rate stuck above 15 percent despite the ongoing recovery."

Inerestingly, the IMF says medium term growth will be "significantly below the historic average growth rate". But the FED says they think they can end QE and then look to raise interest rates. We'll see what actually happens.

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