When the IMF produced its last World Economic Outlook in October, one of the risks it forecast was a possible oil price increase. A US$25 per barrel increase, the IMF said, would take at least 0.5% off global economic growth.
Now, even with the change in oil price twice as large and in the opposite direction, the IMF has once again revised its growth forecasts down, trimming 0.3% off global economic growth this year and next.
These persistent downward revisions to the IMF's forecasts (see Box 1.2 here) always hog the headlines, with their melancholy message that things are worse than we thought. But the commentary should do more than focus just on the downward revisions to the forecast numbers. The forecasts should also be put in the context of what has already happened during the recovery phase since the 2008 crisis, summarised in this table:
Table cites fourth-quarter growth rates rather than year-on-year growth, to better reflect of the shape of the cycle.
The post-2008 recovery started well enough, with worldwide fiscal stimulus boosting growth in 2009 and 2010. But the 2010 Greek crisis triggered widespread angst about excessive government debt. Fiscal stimulus was replaced by austerity.
Instead of the above-average growth normally associated with a recovery (the US, for example, typically records around 5% growth after a recession), growth in the advanced economies was anaemic. Overall global economic growth was, however, maintained at a reasonable pace by the continuing good performance of emerging economies, which grew three to four times faster than advanced economies.
So, this is not a story about a slowing global economy, either in recent years or in the forecast: global economic growth has started with a '3' for the past three years and in the two years that have been forecast. Instead of talking about forecasting failures, the theme should be why this recovery — both in the recent past and in the outlook — has been much less vigorous than usual, with the advanced economies stuck in a rut. [fold]
So why is world GDP below trend and growing slower than normal?
(Source: Min Zhu, 'Unlocking Global Growth', International Monetary Fund)
Any explanation has to acknowledge the policy failures of the past six years: the mistaken switch from stimulus to austerity in 2010; the failure to reschedule adequately the unsustainable peripheral debt (Greece, Spain, Portugal, Ireland and Italy); the European Central Bank's ham-fisted monetary performance; and the lost opportunity to use the sustained period of low interest rates to tackle widespread infrastructure inadequacies.
But recessions don't last forever. Eventually balance sheets are repaired; old equipment needs replacing and housing over-investment is taken up. The fiscal austerity (which took 2% off European growth in 2011 and 2012 and the same off US growth in 2012 and 2013) has now run its course. The ECB has finally agreed on some quantitative easing-style stimulus. The downward cyclical phase in the European periphery has found a turning point, with even Greece and Spain registering some growth (from a miserable starting point 25% below the 2007 GDP level). And the global oil price is down more than 50%, which the IMF says, taken by itself, would add 0.3-0.7% to global economic growth.
This might be the moment to call an end to the repeated downward revisions to growth forecasts, and take a punt on global economic growth being a bit stronger (this year and next) than the new IMF forecast predicts.