Friday, 29 August 2014

IMF astounded at 'uneven' growth, new thinking needed

The IMF’s World Economic Outlook (WEO) released earlier this month revised its global growth projection down 0.3% to 3.4%. The reason: unanticipated factors. Seriously.

Once again it’s the same old story from the International Monetary Fund. At the beginning of the year it was “growth, growth, growth” all around, and then came the disappointing results. Now after every quarter analysts seem surprised the world economy didn’t perform as well as expected.

But don’t worry, apparently the world economy will grow to the elusive 4% mark by the end of the year as it transitions into a brighter 2015. Of course, that was the IMF’s prediction last quarter too, and at the end of last year. Each time the economy clocked in well below expectations.

The latest Outlook isolates four negative surprises hurting activity. In the US a “harsh winter” slowed demand and exports “declined sharply”. Chinese domestic demand moderated more than expected. Russian economic activity decelerated severely. And emerging economies suffered from weak external demand in the US and China particularly.

In other words, the slower growth had nothing to do with the system. Not one bit.

Even though the IMF analysts didn’t forecast all these “temporary” events impacting growth over the first half of 2014, they remain optimistic the rest of the year will be smooth. Apparently the numbers also suggest a “somewhat stronger growth” next year as well.

“Leading indicators point to the global recovery regaining strength in the second quarter of 2014,” the report says.

“Global growth is expected to rebound from the second quarter of 2014, as some of the drivers underlying first-quarter weakness should have only temporary effects, and others should be offset by policies, including in China,” the report says.

Downside risks remain a concern, it says. Global growth could be weaker for longer, given the lack of robust momentum in advanced economies despite very low interest rates and the easing of other brakes to the recovery.

“Nevertheless, some of the demand weakness in the first quarter appears to be more persistent, especially in investment globally, and is expected to result in lower global growth in 2014 compared with that predicted in the April 2014 WEO.”

The report’s growth predictions for the major economic blocs are interesting too, but mainly for their frankness.

“A growth rebound is underway in the United States as temporary factors wane. But with a more muted recovery in investment, the rebound is expected to provide only a partial offset to the weak first-quarter outcome,” it says. US growth is now projected at 1.7% for 2014, rising to 3% in 2015.

“In the European Union, continued financial fragmentation, impaired private and public sector balance sheets, and high unemployment in some economies will mean uneven growth,” revealing no real surprises. Growth in the euro area is expected to strengthen to 1.1% in 2014 and 1.15% in 2015.

“In Japan, with a stronger than expected performance in the first quarter, growth in 2014 is now projected to be higher at 1.6%, decelerating to 1.1% in 2015, mostly due to the planned unwinding of fiscal stimulus,” the report says.
Chinese authorities will resort to limited and targeted policy measures to support activity in the second half of the year, including tax relief for small and medium enterprises and accelerated fiscal and infrastructure spending.

“As a result, growth in 2014 is projected to be 7.4%. For next year, Chinese growth is projected to moderate to 7.1% as the economy transitions to a more sustainable growth path.”

The IMF also says that in many economies – advanced and emerging market alike – there is an urgent need for structural reforms to strengthen growth potential or make growth more sustainable. But given the lack of accurate past predictions, it’s now much more difficult to assume the report’s forecasting potential. The “temporary” setbacks all seem to have a familiar ring to them. And it’s becoming increasingly necessary to consider that those setbacks might be more systemic than fleeting.

The global financial crisis is exposing a new normal for the world system. Growth has been slow to halting since 2011 and there’s been no reliable way to tell exactly why. Back before the GFC the world was in a super-growth period overrunning GDP in many advanced economies. Slower growth across those economies since suggests the skyrocket figures won’t be seen again for a while.

As economist Ashoka Mody of Princeton University points out, shifting to a lower gear at an average growth rate south of 4% needs to be registered as a natural development in this new economic reality.

That’s not the only new reality.

While advanced economies struggle to grow quickly, emerging economies are also experiencing 6-8% growth rates per year, compounding the problem for larger economies. Their share at the global economic table will only increase, exacerbating global competition for growth.

Ultimately, the IMF’s confusion over lower-than-expected growth rates probably arises more from a misallocation of methodology and a desperate need to think differently about the causes of low growth. Rough economic rivalry, slower growth and low inflation might not be the “temporary” factors the IMF desperately wants them to be. They might be here to stay.

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