Just a quick note that the latest IMF World Economic Outlook is out, and has lots of interesting reading. In particular, there is a large chapter discussing oil market risks that I hope to write about at a later time when I've digested it a bit better.
For now, I just want to put up their forecast for world GDP growth (graph above - slowing slightly to something a little above the recent historical 4% average). They think the probability of an outright recession in the next two years is miniscule (their 90% envelope only goes down to about 2% growth by the end of 2012). Myself, I think the risks to the downside due to an oil shock are much higher than this. But then, last June I thought that the risks of deleveraging to the global economy were higher than the IMF was crediting, and in fact their projections to date were pretty close to reality. On the third hand, in that piece I also documented that the IMF had completely failed to recognize the impact of the housing/credit crash on the global economy until after it had happened. They correctly identified it as the largest risk to global growth, but didn't correctly anticipate that it would really happen.
I guess the picture is that the IMF will usually be about right except at major turning points, which they will fail to credit in advance. On the other side, even when one correctly foresees a turning point, it's very hard to predict the timing accurately and so very easy to end up crying wolf too often ahead of time.
At any rate, they recognize that oil prices are now the biggest risk to the downside:
It's just that they think there's a small (<<10%) risk of this inducing an actual recession. Time will tell.
I'm glad you're looking at chapter 3, Stuart, and I look forward to reading your thoughts on it. I've been trying to get my head around this chapter for the last few days.
ReplyDeleteOverall, I'm impressed. I especially like the chapter's open discussion of the limitations of the IMF's model, the GIMF, such as assumptions of flexible exchange rates and wages, and the absence in the model of real-world linkages between industries. The authors state that the model is unlikely to have any predictive power in the "peak oil" scenario - that's refreshing!
I think that most peak oilers believe a combination of the chapter's "greater decline" and "greater economic role for oil" scenarios (alternatives 2 and 3) -- although for some, the "greater decline" isn't great enough. It would have been nice to see 2 and 3 analysed together.
One question: can you suggest why they'd choose cubic functions of GDP for energy supply and oil demand (appendix 3.2)? I can't come up with a theoretical rationale for a cubic in either case.
Aargh! I've just read your next post, and the comments.
ReplyDeleteThat'll teach me for commenting on one post before reading the next! ;-)
My mental model has until recently been: 1) oil prices rise due to supply insufficiency, 2) raising costs and prices of other elements of the "basket", signalling inflation pressures, 3) governments raise interest rates to head off inflation, and 4) recession triggered by higher interest rates (etc) leading to (oil) demand destruction.
ReplyDeleteHowever, the Forward to the IMF report includes (my emphasis) "... the disappearance of wage indexation, and the anchoring of inflation expectations all combine to suggest there will be only small effects on growth and core inflation."
I've recently been wondering if (western) governments won't happily see some stagflation as a way of 1) reducing their debt burden, 2) having a passable economic situation (i.e., not a recession), and 3) passing on a consistent market price signal that oil supplies in fact are limited. If governments follow this approach, we may get a decade or more of sluggish economy that could lay the ground work for a move away from oil.
"If governments follow this approach, we may get a decade or more of sluggish economy that could lay the ground work for a move away from oil." If that's the optimal scenario, the guys stocking up on guns, beans and grits might be looking at a more realistic outcome. Yikes.
ReplyDeleteOh yeah, and we may conveniently forget that global "growth" of 5 % was achieved by huge increase in DEBT, and that global imbalances are now WORSE than before the 2008 crash, S&P informs:
ReplyDeleteThe financial system poses an even greater risk to taxpayers than before the crisis, according to analysts at Standard & Poor's. The next rescue could be about a trillion dollars costlier, the credit rating agency warned...
The potential for further extraordinary official assistance to large players in the U.S. financial sector poses a negative risk to the government's credit rating,” S&P said in its Monday report.
But, the agency's analysts warned, "we believe the risks from the U.S. financial sector are higher than we considered them to be before 2008."
Because of the increased risk, S&P forecasts the potential initial cost to taxpayers of the next crisis cleanup to approach 34 percent of the nation's annual economic output, or gross domestic product. In 2007, the agency's analysts estimated it could cost 26 percent of GDP.
Last year, U.S. output neared $14.7 trillion, according to the Commerce Department. By S&P’s estimate, that means taxpayers could be hit with $5 trillion in costs in the event of another financial collapse."
http://www.declineoftheempire.com/2011/04/derivatives-craziness-and-the-next-bailout.html
"Prop up" the present just to screw the future even more...
cheers,
Alex