Italy and the IMF

On Monday night, as was widely expected, Italy’s credit rating was cut for the first time in five years. And in response, the country’s stock market rose.

Shouldn’t S&P’s increasingly negative assessment of Italy’s ability to pay off its debts be a negative for the country? Sure, but only if this news were materially new. Our guess is most folks are (correctly) losing faith in the credit ratings agencies. As we’ve said in this space repeatedly, credit ratings agencies, at best, simply reiterate what is already largely known and reflected in markets. Italy’s woes are now long known and well–trodden. Folks waiting for confirmation from a government-supported oligopoly may find themselves very late to the party indeed. So Italy gets a downgrade, and its stocks rise.

While Italy was grappling with the non-news of their downgrade, the IMF released its revised World Economic Outlook. In it, they announced lowered global economic growth forecasts for 2011—from 4.3% to 4.0%. This includes dropping the forecast for the developed world from 2.2% to 1.6%.

Not a move in the preferred direction, but they are still predicting positive growth globally both this year and next. Everyone would prefer faster growth to slower but 4% global growth is still quite fine, and is a far cry from the global recession commonly feared. In fact, the only major country or region they see negative growth for in 2011 is Japan at -0.5%—tied to the effects of its earthquake and tsunami. And they see the developed world accelerating next year with 1.9% growth in 2012, up from 1.6% this year.

Now, the IMF isn’t an infallible economic forecasting outfit, and we’d quibble with a number of their assumptions, but they’re usually in the ball park. What’s more, the IMF isn’t normally viewed as being supremely optimistic--quite the opposite, in fact. Further, these predictions were made against a backdrop of near-uniform dourness and with full understanding of the situation in Europe—yet they still project growth. Even in Europe! A view we agree with. Of course, risks to global growth remain, but that’s always true. In our view, the greater likelihood is continued growth with pockets growing at varying speeds.