Revisions: The Global Outlook in the WEO
Submitted by Econbrowser
The IMF released the World Economic Outlook’s forecasts yesterday. There’s been plenty of coverage, so I won’t recap the main points, but rather focus in on some interesting aspects:
- The rapidity of the downshifting of estimates since January.
- Commodity price prospects and the LDCs.
Here’s the key table, outlining growth prospects for 2008 and 2009:
Table 1.1 from IMF, World Economic Outlook, April 2008, Chapter 1.My first observation is that there’s been a remarkable drop in projected growth rates in just a few months. Looking at the second column from the right, one sees that the 2008 forecast for year on year growth has dropped by a whole percentage point from the January forecast. This highlights the fact that growth prospects have deteriorated rapidly, in the views of many analysts, although perhaps not as much as represented by the IMF economists. For instance, the Economist’s poll of forecasters only evidenced a 0.6 percentage point drop in 2008 growth forecasts, going from January to April (see this post). The WSJ poll exhibited a 0.8 percentage point decline in 2008 q4/q4 growth going from January to March (April numbers have not been released yet).
The second observation regarding this table pertains to the 2009 forecasts for the US. This forecast dropped 1.2 percentage points. This suggests the IMF is one of the first multilateral organizations I’m aware of that is predicting that the slowdown will be substantially more persistent than earlier thought (well, some people thought, and still think, a recession is avoidable). The Economist’s poll shows only a slightly less pronounced downward revision — of 0.9 percentage points.
Third, note that the Euro Area lags the US in slowing down — but does slow down. Growth in the Euro Area is in fact projected to be 0.2 percentage points slower in 2009 than 2008.
I think the view that the slowdown will be more persistent than originally thought makes a lot of sense, given the deleveraging that is likely to take place as the financial sector takes hits to its assets. In that sense, the main thesis of the IMF GFSR (discussed in this post) and the macro outlook in the WEO are consistent.
On the second major area of concern, I think the IMF has it right that there is a chance that emerging markets will continue to grow even as the developed economies slow substantially. As they rightly point out, many of the vulnerabilities that made emerging markets sensitive to developed country shocks have been attenuated. Most importantly in my mind is the fact that emerging markets and less developed countries (including the oil exporters) have been exporting capital to the US, rather than being dependent upon US capital markets. In the past, increases in real interest rate in the run-up to recessions have induced reductions in emerging market asset prices and subsequent slowdowns (see this paper). So the mean forecast for the emerging markets make sense to me.
However, the IMF staff also warn of downside risks predominating. I think they are right to highlight these concerns. To my mind, the main downside for the LDCs is that the commodity prices do not rise in line with forecast, and perhaps even decline.
Figure 1.17 summarizes the IMF. projections for commodity prices, including oil prices.
Figure 1.17 from IMF, World Economic Outlook, April 2008, Chapter 1.Just as prices for commodities have surprised on the upside over the past couple years (at least I’ve been surprised, but maybe I’ve been naive), they may surprise on the downside. Whether they do probably depends upon the source of the spurt in commodity prices. If they are due to loose monetary policy, as suggested by Frankel [1] (manifesting itself in negative real interest rates) and more recently by Jim [2], then high commodity prices should persist as policy becomes expansionary in the Euro Area and the UK (that’s my projection, not the IMF’s).
If commodity prices are high due to fundamental current demand, then — given the higly price inelastic nature of both commodity demand and supply — we might see big drops in prices as the recession takes hold in the US, and the slowdown propagates to the Euro Area and perhaps even to China (in the latter case, a slowdown would be single digit positive growth). (For the IMF’s comprehensive analysis of the origins of the commodity price surge, and the implications for the emerging markets and LDCs, see Chapter 5 of the WEO.)
A big hazard that I foresee, then, is the possibility that the commodity exporting country governments acclimate themselves to high revenues at exactly the time revenues decline.
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