Think the economy is beginning to struggle?
You should prepare for things to get worse, according to a recent report from the International Monetary Fund ("IMF").
In a report released this morning and covered by the Australian Associated Press, IMF research forecasts that major commodity exporters like Australia could experience a further 1% decline in national growth rates from 2015 to 2017 compared with the previous three years.
Major energy exporters like Saudi Arabia or Venezuela could expect a 2.25% drag on growth as weak prices impact across all sectors of the economy.
Given that Australia's growth is already at 2% and has been well below its long-term 'trend' of 3.25% for most of the last three years, investors could be looking at economic growth of just 1% in the future.
This has uncomfortable implications for businesses like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) as bank profitability is often a reasonable barometer of underlying economic conditions. A decline in the economy will be felt in lower lender volumes and higher bad debts, especially if unemployment increases as well.
Other businesses that are generally a good reflection of underlying conditions are retailers, and it's no coincidence that FlexiGroup Limited (ASX: FXL) and Thorn Group Ltd (ASX: TGA) have fallen 19% and 25% respectively in the past three months as investors revise their future growth expectations for these consumer-credit exposed companies.
If consumer sentiment worsens and nervousness increases, investors could be looking at their first bear market in 7 years – with the S&P/ASX 200 (INDEXASX: XJO) already trading just 5% above this level. Another two market days like today, and we'll be there.
While there is no need to panic – indeed there are plenty of buying opportunities out there – readers do need to start asking themselves 'how will I respond if the market crashes?' Making sure you have some cash on hand would be a good place to start.
