The International Monetary Fund (IMF) has downgraded its outlook for the Australian economy in 2019.
The IMF released its World Economic Outlook report for April, showing that its estimate for real GDP growth in 2019 is just 2.1%, well short of the 2.8% forecast they made in October 2018.
The report also downgraded the outlook for most other developed economies. From October last year to now, the outlook for:
- Germany was cut from 1.9% to 0.8%
- The UK was cut from 1.5% to 1.2%
- Advance Europe fell from 1.9% to 1.7%
Alternatively, the outlook for India has remained stable and has slightly grown for China.
Why The Downgrade?
The IMF stated that risks are currently skewed to the downside. They cited US-China trade tensions and Brexit issues as two important factors in its global downgrade. They also mentioned a softening of growth in the US “as fiscal stimulus fades”.
How This Affects ASX Investors
Slow GDP growth could increase the unemployment rate and remove upward pressure on wage growth. In saying that, the October report from the IMF predicted a 5% unemployment rate in 2019, while the most recent report predicts a 4.8% unemployment rate.
Looking at the impact on ASX shares, slow economic growth obviously affects the pace that businesses can grow. Slow wage growth and higher unemployment mean less consumer spending and less revenue for businesses that provide non-essential products or services. That means fewer loans from the likes of Commonwealth Bank (ASX: CBA) or Westpac (ASX: WBC).
It may also give the RBA another reason to consider cutting rates. The IMF estimated in October that Australia would see consumer prices (i.e. inflation) grow by 2.3% in 2019. They now predict it will be closer to 2%, putting it towards the low end of the RBA’s inflation target.
Time To Buy Defensive Shares?
This isn’t a reason to panic. It is, however, another sign that the economy is facing risks and uncertainty and that global growth is continuing to slow.
When economies are uncertain and sluggish, it’s important to invest only in businesses of the highest quality, and preferably businesses that have a defensive revenue stream, like Bapcor Limited (ASX: BAP) or Woolworths Group Limited (ASX: WOW).
For ideas on shares that might fare well in a downturn, Rask Media recently published this article, “3 ASX Shares To Beat TheAustraliann Recession”.
Alternatively, grab a free copy of our Proven Shares Investing Report below.
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
