16 to 22 July: Take the IMF’s view with a pinch of salt

Last week, the International Monetary Fund (IMF) updated its global macroeconomic assessment and kept the headline aggregate growth forecasts for 2018 and 2019 unchanged at 3.9%. Even though the headline global growth rates have not changed, growth projections for several economies have been revised due to the shifts in the balance of risks induced by trade tensions. Prospects for the Euro Area (2.2% and 1.9%), Japan (1% and 0.9%) and the United Kingdom (1.4% and 1.5%) were downgraded, while forecasts for the US (2.9% and 2.7%) and China (6.6% and 6.4%) have not changed. Overall, the outlook presented by the IMF is rather gloomy, as large weights are assigned to future events with a negative impact on EM growth, such as further and sustained increases in commodity prices and tighter financial conditions induced by the Fed.

We acknowledge that there are looming risks that could weigh on the global economic momentum, but we do not think that the Fed is heading towards a policy mistake that could trigger an unwanted downturn nor that commodity prices will soar. Furthermore, within the EM universe, some countries with insulated domestic economies can rely on their inherent structural growth potential that shields them from the impact of the trade wars, such as China and India, while others possess stable macroeconomic foundations to weather turbulent times, e.g. Peru, Chile and Morocco.

Both the Brent crude oil price for September delivery and WTI for August delivery fell more than 4% last Monday, to USD 72/bbl and USD 68/bbl, respectively. The collapse in crude oil prices were driven by speculations that Saudi Arabia intends to bring additional supplies to the market. Rumours citing that the US could increase the supply in the oil market by releasing its Strategic Petroleum Reserves amplified the extent of the price drop. Furthermore, US Treasury Secretary Mnuchin’s statement weighed on oil prices as well. According to Mr Mnuchin, some crude importers may receive waivers to continue purchasing oil from Iran. Throughout the week both Brent and WTI prices went sideways, as they could not recover even after Saudi Arabia announced later that oil exports may decrease in August. Brent for September delivery closed the week at USD 73/bbl, while WTI for August delivery at USD 70/bbl.

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