Written by Steven Hansen
According to the International Monetary Fund’s World Economic Outlook, the global economy will improve in 2014-15 due to improving outlooks for the advanced economies. I wonder how this forecast was formulated.
First, we should take a look at the previous forecasts by the IMF. It is interesting to compare the wording from their pre-Great Recession forecast to the one issued for 2014-15.
|Looking ahead, global growth is projected to strengthen from 3 percent in 2013 to 3.6 percent in 2014 and 3.9 percent in 2015, broadly unchanged from the October 2013 outlook. In advanced economies, growth is expected to increase to about 2¼ percent in 2014–15, an improvement of about 1 percentage point compared with 2013. Key drivers are a reduction in fiscal tightening, except in Japan, and still highly accommodative monetary conditions. Growth will be strongest in the United States at about 2¾ percent. Growth is projected to be positive but varied in the euro area: stronger in the core, but weaker in countries with high debt (both private and public) and financial fragmentation, which will both weigh on domestic demand. In emerging market and developing economies, growth is projected to pick up gradually from 4.7 percent in 2013 to about 5 percent in 2014 and 5¼ percent in 2015. Growth will be helped by stronger external demand from advanced economies, but tighter financial conditions will dampen domestic demand growth. In China, growth is projected to remain at about 7½ percent in 2014 as the authorities seek to rein in credit and advance reforms while ensuring a gradual transition to a more balanced and sustainable growth path.||While the 2007 forecast has been little affected, the baseline projection for 2008 global growth has been reduced by almost ½ percentage point relative to the July 2007 World Economic Outlook Update. This would still leave global growth at a solid 4¾ percent, supported by generally sound fundamentals and strong momentum in emerging market economies.|
|Global activity has broadly strengthened and is expected to improve further in 2014–15, with much of the impetus coming from advanced economies. Inflation in these economies, however, has undershot projections, reflecting still-large output gaps and recent commodity price declines. Activity in many emerging market economies has disappointed in a less favorable external financial environment, although they continue to contribute more than two-thirds of global growth. Their output growth is expected to be lifted by stronger exports to advanced economies. In this setting, downside risks identified in previous World Economic Outlook reports have diminished somewhat. There are three caveats: emerging market risks have increased, there are risks to activity from lower-than-expected inflation in advanced economies, and geopolitical risks have resurfaced. Overall, the balance of risks, while improved, remains on the downside.||The global economy grew strongly in the first half of 2007, although turbulence in financial markets has clouded prospects. Risks to the outlook, however, are firmly on the downside, centered around the concern that financial market strains could deepen and trigger a more pronounced global slowdown.|
|The renewed increase in financial volatility in late January of this year highlights the challenges for emerging market economies posed by the changing external environment. The proximate cause seems to have been renewed market concern about emerging market fundamentals. Although market pressures were relatively broadly based, countries with higher inflation and wider current account deficits were generally more affected. Some of these weaknesses have been present for some time, but with prospects of improved returns in advanced economies, investor sentiment is now less favorable toward emerging market risks. In view of possible capital flow reversals, risks related to sizable external funding needs and disorderly currency depreciations are a concern. Some emerging market economies have tightened macroeconomic policies to shore up confidence and strengthen their commitment to policy objectives. Overall, financial conditions have tightened further in some emerging market economies compared with the October 2013 World Economic Outlook. The cost of capital has increased as a result, and this is expected to dampen investment and weigh on growth.||Financial market conditions have become more volatile. As discussed in the October 2007 Global Financial Stability Report (GFSR), credit conditions have tightened as increasing concerns about the fallout from strains in the U.S. subprime mortgage market led to a spike in yields on securities collateralized with such loans as well as other higher-risk securities. Uncertainty about the distribution of losses and rising concerns about counterparty risk saw liquidity dry up in segments of the financial markets. Equity markets initially retreated, led by falling valuations of financial institutions, although prices have since recovered, and long-term government bond yields declined as investors looked for safe havens. Emerging markets have also been affected, although by relatively less than in previous episodes of global financial market turbulence, and asset prices remain high by historical standards.|
|Emerging market economy policymakers must adopt measures to changing fundamentals, facilitate external adjustment, further monetary policy tightening, and carry out structural reforms. Emerging market economies will have to weather turbulence and maintain high medium-term growth. The appropriate policy measures will differ across these economies. However, many of them have some policy priorities in common. First, policymakers should allow exchange rates to respond to changing fundamentals and facilitate external adjustment. Where international reserves are adequate, foreign exchange interventions can be used to smooth volatility and avoid financial disruption. Second, in economies in which inflation is still relatively high or the risks that recent currency depreciation could feed into underlying inflation are high, further monetary policy tightening may be necessary.||Thus, the immediate focus of policymakers is to restore more normal financial market conditions and safeguard the expansion. Additional risks to the outlook include potential inflation pressures, volatile oil markets, and the impact on emerging markets of strong foreign exchange inflows. At the same time, longer-term issues such as population aging, increasing resistance to globalization, and global warming are a source of concern.|
Based on word comparisons, it does not give one confidence in the forecast of growth acceleration – as we all know what happened shortly after the issuance of the 2007 forecast. Consider that:
- few main stream economists have ever forecast a recession;
- most of the infamous economists are theorists, and are not intimate with data fluctuations – nor are they practiced in interpreting the micro-movements.
Seems most forecasts are a simple look at current GDP growth trends, and then a guess. Beats wasting your time assembling data and running calculations, as there is no formula that comes close to being able to project economic growth.
Time to bring out the Ouija Board – or to put it away until the next forecast is scheduled.
Other Economic News this Week:
The Econintersect Economic Index for April 2014 is again showing an extremely slight growth deceleration – but a growing economy nonetheless. There are a growing number of soft data points we watch outside of our index which bears watching. The economy remains too strong to recess, and too weak to grow.
The ECRI WLI growth index value has been weakly in positive territory for many months – but now in a noticeable improvement trend. The index is indicating the economy six month from today will be slightly better than it is today.
Current ECRI WLI Growth Index
Initial unemployment claims went from 326,000 (reported last week) to 300,000 this week. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate. The real gauge – the 4 week moving average – marginally improved from 321,000 (reported last week as 319,500) to 316,250. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.
Weekly Initial Unemployment Claims – 4 Week Average – Seasonally Adjusted – 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line)
Bankruptcies this Week: Tuscany International Drilling, James River Coal, DynaVox, Coldwater Creek, Privately-held Glacial Energy Holdings