Weekly Economic Commentary 10/13/14

Weekly Economic Commentary imageGauging Global Growth in 2014 & 2015
Update: Acceleration Expected

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 begin to digest the S&P 500 earnings reports
for the third quarter of 2014, we provide an update on how consensus
estimates for economic growth for 2014 and 2015 — in the United States and
worldwide — have evolved over the past few years.
The International Monetary Fund (IMF) cut its global growth forecasts for both
2014 and 2015 last week (October 6–10, 2014), noting that the outlooks for
the Eurozone, Brazil, Russia, and Japan have deteriorated since the summer
of 2014, the last time it released a forecast. The IMF’s downgrade of global
growth — along with its warning about a “frothy” equity market — was cited
by many market participants as the catalyst for the equity market sell-off and
related volatility last week.
As we have noted in our previous updates on the global growth outlook,
the new forecast from the IMF should not have generated the reaction it
did. Typically, when the IMF releases a forecast, the majority of financial
market participants take little notice of the report. 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 more than two-thirds of total costs. A good proxy for global revenue
growth is…

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