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Di Nikola Kedhi

The International Monetary Fund gathered this Tuesday to discuss the situation of the world economy and the risks that it faces. Amid Brexit fears, slow demand, continuously low oil prices and geopolitical turmoil, the outlook for the future was not at all bright. On the other hand, stock markets proved to be a welcomed contrast to the predictions of the Fund one day later when they rose to the highest levels for the year. The question remains whether this increase in stocks is sustainable or is simply a fleeting occurrence with no real fundamentals.

The IMF, in its semiannual World Economic Outlook, warned of a sluggish increase in the world economy. The Fund downgraded expectations not only for emerging economies, but also for developed ones. The decision was to reduce the global growth forecast for 2016 to 3.2%, a 0.2% decrease from the original prediction. The US economy is expected to grow by 1.9%, Eurozone by 2.4%, Japan 0.5%, and the UK by 1.9%.

The world economy was considered “increasingly disappointing”, while its growth has been slow for too long according to the chief economist of the IMF. This has come as a result of several consecutive and often correlated crises and problems in various economies. China was one of the causes for much of the turmoil that happened last summer. However, it is expected to grow by 6.5%, 0.2% more than the previous expectations. Nevertheless, we should not expect China to regain its former pace of growth that easily. It will take some time, a lot of reforms and more openness before it finds some stability.

Oil prices have improved somewhat these couple of months, stabilizing at approximately $40 to $44. According the IMF report, developing countries and especially oil exporters will have a more difficult path towards sustainable growth until they are able to diversify their portfolios.

Slow demand, the decrease in expectations, unstable levels of inflation etc. are all symptoms and not the underlying cause of the situation in which the global economy finds itself. As the IMF itself emphasizes, it is real and extensive reform that is lacking. We have now entered unchartered territories with 25% of world economies adopting negative interest rates. In the EU, extremely loose monetary policies aimed at increasing inflation are not giving any results. Instead of depreciating, the Euro does the opposite. Japan, who implemented negative rates too, continues to struggle. Japan PM Abe’s reforms known as Abenomics have failed to boost growth. The US has raised interest rates and is nearing full employment. However, while many market participants expect the dollar to increase, it depreciates. In fact, some investors are betting against the dollar, meaning they believe it is going to fall.

All this uncertainty and abnormality derive from the lack of confidence in individuals. People are tired of suffering the consequences of the 2008 crisis without seeing any solution on the horizon. Not surprisingly, this has led to the rise of nationalist parties and politicians, both in Europe and the US. In its report, the Monetary Fund warned of a “rising tide of inward-looking nationalism”. The most imminent threat of this kind is Brexit. The IMF cautioned of the severe damage that a British exit from the EU would cause, not only to the UK but also to the world economy. On the same day, British Chancellor of Exchequer George Osborne approved of the message deriving from the IMF meeting. He added that “If the British economy is hit by the mere risk of leaving the EU, can you imagine the hit to people’s income and jobs if we did actually leave?” The conclusion was clear: the only possibility for the UK to have a seat at the global leaders’ table is to remain in the Union.

While the IMF gave its warnings and recommendations, stocks continued their upward trend in every market. The European Stoxx 600 increased 2.9%, the S&P added 0.7%, and the Hong Kong Index jumped 3.2%, while the Shanghai Composite gained 1.4%. Overall, the FTSE All World index rose 1.2%. Each of these surges was due to some event or development. In China, trade data beat expectations. In Europe, banks saw increases in their shares as a deal was finally achieved to create a fund in order to help Italian lenders. Wall Street opened Wednesday on a positive note as JP Morgan Chase released its quarterly earnings report with better than expected figures. Thus, seeing it from this perspective, doubts arise as to how sustainable the stock markets are. Have investors regained confidence enough to abandon financial havens and move towards more risky assets? Is this bullish sentiment real and justified, or will it fade with the first sign of distress, as the sceptics suggest?

Right now, markets are calm and stable enough. Yet, the imminent threat coming from the island of Great Britain will be the first real test for markets this year.