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IMF shock: World economy still growing

Predictions of the death of the economy are greatly exaggerated, writes The Motley Fool

Uncertainty is the last refuge of economists who can’t explain what is going on.”

You’d think the International Monetary Fund (IMF) should know more. It is an organisation of 187 countries, working to promote high employment and sustainable economic growth, and reduce poverty around the world.

It should have its finger on the economic pulse.

Oops…missed this one

But no. In slashing global growth forecasts and warning the world has entered a “dangerous new phase”, IMF chief economist, Olivier Blanchard, says he “largely failed to perceive” the slowdown as it was happening this year.

And now, after world sharemarkets have plummeted, Greece is on the verge of default, Italy has had its debt downgraded and U.S. unemployment is stuck above 9%, the IMF cuts its global growth projections.

Talk about shutting the barn door after the horse has already bolted…

The Reserve Bank of Australia (RBA) is in the same camp, saying the international outlook has become “significantly more clouded”.

All this translates into some juicy newspaper headlines.

The global economy projected to grow

But the fact of the matter is the IMF is still projecting 4% growth in world output in 2011 and 4% growth in 2012.

In this low interest rate environment, those growth rates are nothing to be sneezed at.

As far as sharemarket investors are concerned, from the low valuations and high dividend yields many stocks are trading at, it’s good news.

Simple is good as far as The Motley Fool is concerned. Assuming shares are fairly valued*, if companies can grow their earnings by around 4%, and maintain a 5% dividend yield, investors should be looking at an annual return of 9%. We’ll take a baseline of  9% compounding growth all day long, thank you very much.

Cheap shares could get cheaper

That said, we’re not naïve enough to admit simple doesn’t always work. Shares may be cheap now, but it doesn’t mean they can’t get cheaper. If that happens, you can forget your 9% return over the next year or so.

And, adding to the uncertainty, the latest IMF projection is just as likely to be wrong as the one before, and the one before that. Why we give such prominence to wrong predictions is beyond us. They make for great ‘doom and gloom’ headlines, the kinds of which sells newspapers, but as we pointed out above, they really are hindsight projections.

The Foolish bottom line

One thing is certain. If Europe implodes or if America’s economy does slump into a double-dip recession, the IMF will be there to tell us all about it…3 months after the event.

Whatever happens, sharemarket investors have time on our side. Shares are not going to return 9% every year, year in year out. But over time, particularly from this relatively low base, we’d rather be buyers than sellers.

*Many shares appear undervalued, not merely fairly. An upward re-rating of shares, combined with an annual return of 9%, could see sharemarket’s power forward from here. Fools dreaming? Maybe. But dreams are free.

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