Friday, July 9, 2010

Should You Believe the IMF's Optimism?

Yesterday, the International Monetary Fund released a new update to their World Economic Outlook that was rather chipper in tone:
World growth is projected at about 4½ percent in 2010 and 4¼ percent in 2011. Relative to the April 2010 World Economic Outlook (WEO), this represents an upward revision of about ½ percentage point in 2010, reflecting stronger activity during the first half of the year. The forecast for 2011 is unchanged. At the same time, downside risks have risen sharply amid renewed financial turbulence. In this context, the new forecasts hinge on implementation of policies to rebuild confidence and stability, particularly in the euro area.
The figure above shows their forecasts for global growth in the world economy (blue), along with the emerging economies (orange) and advanced economies (red).  Looks pretty good.

That doesn't sound too plausible to me - with a massive global deleveraging cycle just getting under way, government stimulative efforts of last year winding down, and political and sovereign credit issues likely to limit further stimulus, my gut feel is that we'll be lucky to avoid another contraction next year.

But who am I to question the IMF?  As we all have been recently warned, economics is hard and blogger's opinions on it are worthless.  Presumably, however, the IMF employs first rate economists and their forecasts should therefore be reliable.

Wanting to check up on this, I went back through the archives of past WEO reports, looking at what the IMF said as the great recession developed.  This is what they thought in September 2006 (by when it was reasonably clear to those of us who believed in bubbles that the housing bubble in the US was bursting):

Since global growth did not in fact slow down much in 2007, this wasn't too bad - and they were warning of possible risks ahead, to their credit.

By October 2007, this was their view:

This isn't so good - growth in 2008 slowed down massively, and they did not foresee it - what actually happened was outside their 90% confidence interval.

By October 2008, with a massive global financial crisis in full-flower (Lehman bankruptcy in September 2008 remember), governments running around like chickens with no heads to prop up the banks and avoid a complete global collapse, the IMF could only bring themselves to project a slowdown to 3% world growth in 2009:

Even their 90% confidence lower bound did not allow for an actual contraction in the world economy.  They did acknowledge that things were slowing down, but that was about it.

By January 2009 (three months later, and around what would later turn out to be the trough of the global economy), they were willing to credit a much sharper global slowdown, but not yet an actual contraction:

By April 2009, they were finally willing to credit the actual global contraction that was underway:

In short, the IMF completely failed to foresee that a massive global financial crisis was likely to lead to a global recession.  Their 'forecasts' were a lagging indicator of what was happening.  (I have argued previously that this kind of thing is inherent in the nature of economics as a science).

Anyway, you might want to take their optimism now with a pinch of salt.


adamatari said...

Economics is not a science, at least not mainstream economics. The economy rests on natural resources and labor, but economics today focuses on money. Money in the financial system can grow infinitely because it is not a natural thing, but a product of the mind.

I admit that I'm mostly cribbing from the archdruid. However, he's got a point - when nearly half of the profits come from shuffling numbers, something is seriously wrong.

Even if economics was a science, forecasting is always a very sketchy enterprise. Of course, the IMF is not the most trustworthy enterprise even forgetting about their forecasts. Their advice to countries in trouble has always been more or less equivalent to "why don't you go have a recession and destroy your middle class?".

All that aside, I agree that optimism is not warranted.

Alexander Ac said...

Nathan Hugens has a relevant post and asks "What if future growth in not possible?" over at TOD Campfire:

Can I suggest that Japan could "sustainably" deleverage thanks to an economic growth? Thus stagflation instead of deflation was possible there? But then, I am not an economist :-)


Alexander Ac said...

And sorry for the stupid question,

but is not the economic growth the single main cause of most of the environmental and economic problems we are trying to solve?

permabear said...

I wonder where the growth is going to come from in 2011. Both the U.S. and Europe are in austerity mode. Stimulus basically drove both economies since the collapse of 2008. China has been in a restrictive mode with many seeing a property bubble that is on the verge of turning over. Many other developing nations like Brazil and even Russia depend on rising commodity prices for their growth. Commodity prices have come off their lows but have stalled out more recently. Personally I think that recession in both the U.S. and Europe are likely possibilities in 2011 and if this comes to be, it can damper the rest of the world economy in 2011. Thus I think the IMF's projections are quite optimistic.