Thursday, July 8, 2010

The IMF's More Sanguine Take on Global Growth

Despite widespread uneasiness recently about the prospects for economic activity in the U.S. and Europe, the IMF's latest forecast that was released this morning paints a noticeably more sanguine picture for global growth, both in 2010 and 2011.

The IMF has now revised its 2010 growth estimate for the group of the so-called "advanced economies" (which does not include China or India) to 2.6%- up 0.3% from its previous estimate in April. Next year's growth forecast for those countries has been left unchanged at 2.4%.

Within the group of the "advanced economies", U.S. GDP growth has now been revised higher to 3.3% for this year (from 3.1% previously) and 2.9% in 2011 (from 2.6% before). The Japanese economy is now expected to grow by 2.4% this year (versus an earlier estimate of 1.9%), while a modestly slower pace expected in 2011 (1.8% now, compared to 2.0% before). As a whole, the growth forecast for the eurozone bloc has remained unchanged at 1.0% for this year but has been downgraded by 0.2% to 1.3% for 2011.

The basic tenor of the revised forecasts consists of a small upward revision to this year's global growth, and little overall change to next year's expected growth. However, the detailed country-by-country estimates now show a marginal softening in economic activity in most of the "advanced economies" in 2011, which is offset by a moderate upward revision to the growth estimate for the U.S. next year.

The GDP growth forecast for Asian has now been revised upward to 7 1/2% this year from 7% previously, as a result of the inventory cycles and "continued buoyancy in exports and private domestic demand", while there is no change to next year's previously published forecast for a more moderate and sustainable growth rate of about 6%.

Taken literally, the IMF's upward revisions to this year's growth forecasts, and the fairly minimal downward revisions for most countries in 2011, are counter-intuitive. They seem to run contrary to the recent perception of considerably elevated risks to global growth due to the fiscal turmoil in Europe and an ensuing wave of fiscal austerity.

There are two key elements here that can help reconcile this apparent inconsistency. a) The IMF explicitly acknowledges in its report the "markedly" escalated risks to growth ahead, stemming from the financial stress associated with the sovereign debt situation and the policy response to it. At the same time, it appears that, in formulating the revised forecasts, the IMF's operating assumption is that those challenges can still be contained reasonably well without chocking growth. In other words, it views those headwinds to growth as remaining still in the sphere of a "risk" rather than having already taken a central role in driving growth ahead or having over-run the natural growth dynamics already in place. b) Economic forecasts are, to a considerable extent, a "dry" (and highly imperfect at that) exercise, where assumptions are used as inputs and "results" are automatically generated in the form of point estimates. Revisions to the tune of 0.2%, 0.3%, or even 0.5% practically represent something less than a rounding error- therefore, their true reliability needs to be viewed with a grain of salt.

Perhaps, the key message from the IMF's revised forecasts is that, headline-grabbing as they have been lately- the sovereign market situation and fiscal policy developments should be monitored closely but not considered yet as a defining factor already shaping the growth trajectory ahead.

Anthony Karydakis