GAUGING GLOBAL GROWTH

AN UPDATE FOR 2015 & 2016

Weekly Economic Commentary

John Canally Chief Economic Strategist, LPL Financial

The outlook for global growth is important to investors, since it defines the ultimate pace of activity that creates value for countries, companies, and consumers. As investors digest the S&P 500 earnings reports for the fourth quarter of 2014, we provide an update on how consensus estimates for economic growth for 2015 and 2016 — in the United States and worldwide — have evolved over the past few years, and in particular, since oil prices peaked in mid-2014.

The International Monetary Fund (IMF) cut its global growth forecasts for both 2015 and 2016 last week (January 19 – 23, 2015). While the IMF raised its estimate for growth in 2015 for developed economies, all of the increase to that estimate came in the United States; the IMF lowered its estimates for all other developed economies, except the United Kingdom where 2015 growth estimates were unchanged. The IMF sharply lowered its 2015 growth estimate for emerging markets (EM), with oil-producing, EM nations like Russia, Saudi Arabia, Mexico, Brazil, Venezuela, and Nigeria seeing the largest markdowns in growth.
Typically, when the IMF releases a forecast, the majority of financial market participants
take little notice of the report, and that was generally the case last week, as markets
focused more on the price of oil and the European Central Bank (ECB), than on the IMF.

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Why? Because consensus forecasts for global gross domestic product (GDP) growth are available monthly from sources like Bloomberg News, and because markets constantly react to changes in projected paths of economic growth amid the daily, weekly, and monthly drumbeat of economic data and global events.

WHY GLOBAL GDP GROWTH MATTERS
In the past, prospects for U.S. economic growth garnered the most attention from market participants, but in recent years markets have focused more on the prospects for global GDP growth. Why does global GDP growth matter? As we have noted in prior Weekly Economic Commentaries, financial markets — especially equity markets — focus intently on earnings. Broadly speaking, earnings growth is driven by “top-line” growth, or revenue growth, less the costs incurred earning that revenue, with labor accounting for….

Read the Full Report here:Economic Commentary 01262015