The IMF’s big chill

But optimism survives growth update.

Neil Sedaka was no economist. But the Juilliard-trained singer-songwriter learned a thing or two about the fickleness of consumer demand. So it is fitting that proponents of the Great Decoupling Theory are now crying themselves to sleep to “Breaking Up Is Hard to Do.”

Nobody with more than sandwich meat next to the cerebellum still thinks the financial crisis, which started with sub-prime mortgages in the United States, will leave the rest of the world unscathed. As the latest International Monetary Fund outlook shows, the planet still gets covered in snot when the world’s largest economy starts sneezing.

On Jan. 28, IMF managing director Dominique Strauss-Kahn tossed out growth projections that were just a few months old, because the economic slowdown is much worse than was expected after central bankers prevented “a total collapse” of the global financial system last year. The Washington, D.C.–based organization now expects the world economy to grow by just 0.5% in 2009, which represents a downward revision of 1.75%, not to mention the weakest forecast since Hitler was stimulating the German market. (Growth of advanced economies is projected to dip 2% on average; while growth in developing economies is expected to slow to 3.3% in 2009, down from 6.3% last year.)

The good news is that Canadian policy wonks are not the only ones claiming to be more optimistic than the IMF, which doesn’t expect a recovery until next year (when it says global growth could hit 3% — if the moon and the stars line up). “Is that the fat lady getting ready to sing?” asked independent Wall Street economist Robert Brusca in a recent research note that highlighted the rising Institute for Supply Management barometer for manufacturing. “While hindsight is 20/20,” Brusca noted, “it is clear that this ISM is acting a lot like it does late in cycles with the recession end within six months or less.”

Bill Witherell, chief global economist with New Jersey–based Cumberland Advisors, won’t say when the worm will turn. But he does point out that the world’s massive stimulus programs must eventually bring on a recovery. And he advises investors to remember that emerging-market equities were outperforming stocks in the developed world before the global bull market brought a knife to the bear-sponsored gunfight last year. But be careful when it comes to loading up on BRICs (stocks from the four largest emerging markets: Brazil, Russia, India and China), which Witherell says are not equally solid as building blocks in a risk-averse portfolio.

The former OECD official says Cumberland is taking a pass on Russia, where geopolitical tensions are rising, the banking system is failing and governance is as weak as its regulatory and legal systems.

India will show strong growth this year, maybe above 5%, but that’s not enough to make Cumberland forget the limited leeway for further fiscal stimulus, not to mention rising geopolitical risks and fraud at Satyam Computer Services, which will both do little to attract foreign investors.

Brazil, however, is seen by the U.S. fund as a relatively safe bet since the largest economy in Latin America is expected to avoid negative growth, and the nation’s sound macroeconomic policies are expected to continue.

And then there is China, Cumberland’s top BRIC pick. Witherell notes the rising risk of social unrest. But if he was writing a song about the Chinese economy (which is expected to grow by more than 6% this year and is supported by “foreign exchange reserves equal to 45% of GDP, a budget surplus equal to 1.8% of GDP, a current account surplus that is 7.9% of GDP, and government debt equal to only 18% of GDP”), it would be called “Slowing Down Is Hard to Do.”