Back in June, we examined the macroeconomic forecasts of the three agencies, the IMF, the OECD and the European Commission, all of which publish forecasts every six months. The IMF has recently published its latest World Economic Outlook (WEO) and its accompanying database. Unlike the April WEO, which, given the huge uncertainty surrounding the pandemic and its economic effects, only forecast as far as 2021, the latest version forecasts as far ahead as 2025.
In essence the picture is similar to that painted in April. The IMF predicts a large-scale fall in GDP and rise in unemployment, government borrowing and government debt for 2020 (compared with 2019) across virtually all countries.
World real GDP is predicted to fall by 4.4%. For many countries the fall will be much steeper. In the UK, GDP is predicted to fall by 9.8%; in the eurozone, by 8.3%; in India, by 10.3%; in Italy, by 10.8%; in Spain, by 12.8%. There will then be somewhat of a ‘bounce back’ in GDP in 2021, but not to the levels of 2019. World real GDP is predicted to rise by 5.2% in 2021. (Click here for a PowerPoint of the growth chart.)
Unemployment will peak in some countries in 2020 and in others in 2021 depending on the speed of recovery from recession and the mobility of labour. (Click here for a PowerPoint of the unemployment chart.)
Inflation is set to fall from already low levels. Several countries are expected to see falling prices.
Government deficits (negative net lending) will be sharply higher in 2020 as a result of government measures to support workers and firms affected by lockdowns and falling demand. Governments will also receive reduced tax revenues. (Click here for a PowerPoint of the general government net lending chart.)
Government debt will consequently rise more rapidly. Deficits are predicted to fall in 2021 as economies recover and hence the rise in debt will slow down or in some cases, such as Germany, even fall. (Click here for a PowerPoint of the general government gross debt chart.)
After the rebound in 2021, global growth is then expected to slow to around 3.5% by 2025. This compares with an average of 3.8% from 2000 to 2019. Growth of advanced economies is expected to slow to 1.7%. It averaged 1.9% from 2000 to 2019. For emerging market and developing countries it is expected to slow to 4.7% from an average of 5.7% from 2000 to 2019. These figures suggest some longer-term scarring effects from the pandemic.
In the short term, the greatest uncertainty concerns the extent of the second wave, the measures put in place to contain the spread of the virus and the compensation provided by governments to businesses and workers. The WEO report was prepared when the second wave was only just beginning. It could well be that countries will experience a deeper recession in 2000 and into 2021 than predicted by the IMF.
This is recognised in the forecast.
The persistence of the shock remains uncertain and relates to factors inherently difficult to predict, including the path of the pandemic, the adjustment costs it imposes on the economy, the effectiveness of the economic policy response, and the evolution of financial sentiment.
With some businesses forced to close, others operating at reduced capacity because of social distancing in the workplace and with dampened demand, many countries may find output falling again. The extent will to a large extent depend on the levels of government support.
In the medium term, it is assumed that there will be a vaccine and that economies can begin functioning normally again. However, the report does recognise the long-term scarring effects caused by low levels of investment, deskilling and demotivation of the parts of the workforce, loss of capacity and disruptions to various supply chains.
The deep downturn this year will damage supply potential to varying degrees across economies. The impact will depend on various factors … including the extent of firm closures, exit of discouraged workers from the labour force, and resource mismatches (sectoral, occupational and geographic).
One of the greatest uncertainties in the medium term concerns the stance of fiscal and monetary policies. Will governments continue to run large deficits to support demand or will they attempt to reduce deficits by raising taxes and/or reducing benefits and/or cutting government current or capital expenditure?
Will central banks continue with large-scale quantitative easing and ultra-low or even negative interest rates? Will they use novel forms of monetary policy, such as directly funding government deficits with new money or providing money directly to citizens through a ‘helicopter’ scheme (see the 2016 blog, New UK monetary policy measures – somewhat short of the kitchen sink)?
Forecasting at the current time is fraught with uncertainty. However, reports such as the WEO are useful in identifying the various factors influencing the economy and how seriously they may impact on variables such as growth, unemployment and government deficits.
Report, speeches and data
- World Economic Outlook, October 2020: A Long and Difficult Ascent
IMF, Report (October 2020)
- World Economic Outlook Databases
IMF (October 2020)
- “We Must Take the Right Actions Now!”—Opening Remarks for Annual Meetings Press Conference
IMF, Speech, Kristalina Georgieva, IMF Managing Director (14/10/20)
- Press Briefing: World Economic Outlook
IMF, Gita Gopinath, Chief Economist and Director of the Research Department, IMF; Gian Maria Milesi-Ferretti, Deputy Director, Research Department, IMF; Malhar Shyam Nabar, Division Chief, Research Department, IMF; Moderator: Raphael Anspach, Senior Communications officer, Communications Department, IMF (13/10/20)
- Explain what is meant by ‘scarring effects’. Identify various ways in which the pandemic is likely to affect aggregate supply over the longer term.
- Consider the arguments for and against governments continuing to run large budget deficits over the next few years.
- What are the arguments for and against using ‘helicopter money’ in the current circumstances?
- On purely economic grounds, what are the arguments for imposing much stricter lockdowns when Covid-19 rates are rising rapidly?
- Chose two countries other than the UK, one industrialised and one developing. Consider what policies they are pursuing to achieve an optimal balance between limiting the spread of the virus and protecting the economy.
Elections are times of peak deception. Political parties have several ways in which they can use data to persuade people to vote for them. At one extreme, they can simply make up ‘facts’ – in other words, they can lie. There have been various examples of such lies in the run-up to the UK general election of 12 December 2019. The linked article below gives some examples. But data can be used in other deceptive ways, short of downright lies.
Politicians can use data in two ways. First, statistics can be used to describe, explain and interpret the past. Second, they can be used as the basis of forecasts of the future effects of policies.
In terms of past data, one of the biggest means of deception is the selective use of data. If you are the party currently in power, you highlight the good news and ignore the bad. You do the reverse if you are currently in opposition. The data may be correct, but selective use of data can give a totally false impression of events.
In terms of forecast data, you highlight those forecasts, or elements of them, that are favourable to you and ignore those that are not.
Politicians rely on people’s willingness to look selectively at data. People want to see ‘evidence’ that reinforces their political views and prejudices. News media know this and happily do the same as politicians, selectively using data favourable to their political leanings. And it’s not just newspapers that do this. There are many online news sites that feed their readers with data supportive of their position. And there are many social media platforms, where people can communicate with people in their political ‘bubble’.
Genuine fact-checking sites can help, as can independent forecasters, such as the Institute for Fiscal Studies. But too many voters would rather only look at evidence, genuine or not, that supports their political point of view.
This can make life hard for economists who seek to explain the world with an open mind, based on a non-biased use of evidence – and hard for economic forecasters, who want to use full and accurate data in their models and to make realistic assumptions, emphasising that their forecasts are only the most likely outcome, not a certainty. As the article states:
Economic forecasts are flawed and their limitations should be acknowledged. But they should not be blindly dismissed as fake facts. And as far as political debate and discourse is concerned, in the long run, the truth may will out.
- Give some specific examples of ways in which politicians misuse data.
- Give some specific examples of ways in which politicians misuse the analysis of economists.
- Distinguish between positive and normative statements? Should economists make policy recommendations? If so, in what context?
- Why are economic forecasts flawed, but why should they not be dismissed as ‘fake facts’?
- Examine the manifestos of two political parties and provide a critique of their economic analysis.
First the IMF in its World Economic Outlook, then the European Commission in its Economic Forecasts (see also) and now the OECD in its Economic Outlook (see also) – all three organisations in the latest issues of their 6-monthly publications are predicting slower global economic growth than they did 6 months previously. This applies both to the current year and to 2016. The OECD’s forecast for global growth this year is now 2.9%, down from the 3.7% it was forecasting a year ago. Its latest growth forecast for 2016 is 3.3%, down from the 3.9% it was forecasting a year ago.
Various reasons are given for the gloomier outlook. These include: a dramatic slowdown in global trade growth; slowing economic growth in China and fears over structural weaknesses in China; falling commodity prices (linked to slowing demand but also as a result of increased supply); austerity policies as governments attempt to deal with the hangover of debt from the financial crisis of 2007/8; low investment leading to low rates of productivity growth despite technological progress; and general fears about low growth leading to low spending as people become more cautious about their future incomes.
The slowdown in trade growth (forecast to be just 2% in 2015) is perhaps the most worrying for future global growth. As Angel Gurría, OECD Secretary-General, states in his remarks at the launch of the latest OECD Economic Outlook:
‘Global trade, which was already growing slowly over the past few years, appears to have stagnated and even declined since late 2014, with the weakness centering increasingly on emerging markets, particularly China. This is deeply concerning as robust trade and global growth go hand in hand. In 2015 global trade is expected to grow by a disappointing 2%. Over the past five decades there have been only five other years in which trade growth has been 2% or less, all of which coincided with a marked downturn of global growth.’
So what policies should governments pursue to stimulate economic growth? According to Angel Gurría:
‘Short-term demand needs to be supported and structural reforms to be pursued with greater ambition than is currently the case. Three specific actions are key:
||First, we need to resist and turn back rising protectionism. Trade strengthens competition and investment and revs up the “diffusion machine” – the spread of new technologies throughout the economy – which will ultimately lift productivity.
||Second, we need to step up structural reform efforts, which have weakened in recent years. And here, I mean the whole range of structural reforms – education, innovation, competition, labour and product market regulation, R&D, taxes, etc.
||Third, there is scope to adjust public spending towards investment. If done collectively by all countries, if the sector and projects chosen have high multipliers, and if combined with serious structural reforms, stronger public investment can give a boost to growth and employment and not increase the relative debt burden.’
On this third point, the OECD Economic Outlook argues that ‘the rationale for such investments is that they could help to push economies onto a higher growth path than might otherwise be the case, at a time when private investment growth remains modest.’
‘Collective action to increase public investment can be expected to boost the initial domestic multiplier effects from the stimulus, since private investment and exports in each economy will benefit from stronger demand in other economies. …the multiplier effects from an investment-led stimulus are likely to be a little larger than from other forms of fiscal stimulus, since the former also has small, but positive, supply-side effects.
In other words, the OECD is calling for a relaxation of austerity policies, with public investment being used to provide a stimulus to growth. The higher growth will then lead to increased potential output, as well as actual output, and an increase in tax revenues.
These policy recommendations are very much in line with those of the IMF.
Videos and Webcasts
OECD warns of global trade slowdown, trims growth outlook again Reuters (9/11/15)
OECD returns to revisionism with growth downgrade Euronews, Robert Hackwill (9/11/15)
OECD: Weak China Import Growth Leads Trade Slowdown Bloomberg, Catherine L Mann, OECD Chief Economist (9/11/15)
OECD Economic Outlook: Moving forward in difficult times OECD PowerPoint presentation, Catherine L Mann, OECD Chief Economist (9/11/15)
Press Conference OECD, Angel Gurría and Álvaro Pereira (9/11/15)
OECD cuts world growth forecast Financial Times, Ferdinando Giugliano (9/11/15)
OECD rings alarm bell over threat of global growth recession thanks to China slowdown Independent, Ben Chu (10/11/15)
OECD cuts global growth forecasts amid ‘deep concern’ over slowdown BBC News (9/11/15)
OECD fears slowdown in global trade amid China woes The Guardian, Katie Allen (9/11/15)
The global economy is slowing down. But is it recession – or protectionism? The Observer, Heather Stewart and Fergus Ryan (14/11/15)
Global growth is struggling, but it is not all bad news The Telegraph, Andrew Sentance (13/11/15)
Economic Outlook Annex Tables OCED (9/11/15)
Press Release: Emerging market slowdown and drop in trade clouding global outlook OCED (9/11/15)
Data handout for press OECD (9/11/15)
OECD Economic Outlook, Chapter 3: Lifting Investment for Higher Sustainable Growth OCED (9/11/15)
OECD Economic Outlook: Full Report OECD (9/11/15)
- Is a slowdown in international trade a cause of slower economic growth or simply an indicator of slower economic growth? Examine the causal connections between trade and growth.
- How worried should we be about disappointing growth in the global economy?
- What determines the size of the multiplier effects of an increase in public investment?
- Why are the multiplier effects of an increase in public-sector investment likely to be larger in the USA and Japan than in the UK, the eurozone and Canada?
- How can monetary policy be supportive of fiscal policy to stimulate economic growth?
- Under what circumstances would public-sector investment (a) stimulate and (b) crowd out private-sector investment?
- How would a Keynesian economist respond to the recommendations of the OECD?
- How would a neoclassical/neoliberal economist respond to the recommendations?
- Are the OECD’s recommendations in line with the Japanese government’s ‘three arrows‘?
- What structural reforms are recommended by the OECD? Are these ‘market orientated’ or ‘interventionist’ reforms, or both? Explain.
There’s some good news and some bad news about the UK economy. The good news is that there are signs that the recovery is gathering momentum; the ‘green shoots’ are growing bigger. The bad news is that it’s the ‘wrong type of growth’!
One of the main underlying problems of the 2008 financial crisis was that household debt had been increasing to unsustainable levels, egged on by banks only too willing to lend, whether as personal loans, on credit cards or through mortgages. When the recession hit, many people sought to reduce their debts by cutting back on spending. This further fuelled the recession.
What the government and most economists hoped was that there would be some rebalancing of the economy, with less reliance on consumer spending to drive economic growth. Instead it was hoped that growth would be driven by a rise in investment and exports. Indeed, the 25% depreciation of sterling exchange between 2007 and 2009 was seen as a major advantage as this would boost the demand for exports and encourage firms to invest in the export sector.
But things haven’t turned out the way people hoped. The recession (or lack of growth) has been much deeper and more prolonged than previous downturns in the economy. Today, real GDP per head is more than 7% below the level in 2007 and many people have seen much bigger declines in their living standards.
But also, despite the austerity policies, the economy has not been ‘rebalanced’ towards exports and investment. Exports are 3% lower than in 2006 (although they did grow between 2009 Q2 and 2011 Q1, but have since stagnated). And investment is 27% lower than in 2006. Household consumption, however, has grown by about 2% and general government consumption by around 9% since 2006. The chart shows the figures, based on 2006 Q1 = 100.
(Click here for a PowerPoint of the chart.)
And recent evidence is that consumption is beginning to grow faster – not because of rising household incomes, but because of falling saving rates. In 2008, the household saving ratio had fallen to nearly 0% (i.e. households were on average saving about the same as they were borrowing). Then the saving ratio rose dramatically as people reined in their spending. Between 2009 and 2012, the ratio hovered around 7%. But in the first quarter of 2013, it had fallen to 4.2%
So the good news is that aggregate demand is rising, boosting economic growth. But the bad news is that, at least for the time being, this growth is being driven by a rise in household borrowing and a fall in household saving. The videos and articles consider whether this is, however, still good news on balance.
Britain’s imbalanced economy The Economist, Zanny Minton Beddoes and Richard Davies (4/7/13)
Britain’s Export Drought: an enduring disappointment The Economist, Andrew Palmer and Richard Davies (9/2/13)
‘Green shoots’ of economic recovery in Rugby BBC News, Paul Mason (12/6/13)
Is the UK economy seeing the ‘wrong kind’ of green shoots? BBC News, Stephanie Flanders (3/7/13)
The export drought: Better out than in The Economist (9/2/13)
Exports and the economy: Made in Britain The Economist (21/1/12)
The economy: On a wing and a credit card The Economist (6/7/13)
Unbalanced and unsustainable – this is the wrong kind of growth The Telegraph, Jeremy Warner (8/7/13)
The UK economy’s looking up – but no one’s told manufacturers The Guardian, Heather Stewart (10/7/13)
Quarterly National Accounts, Q1 2013 (27/6/13)
Forecasts for the UK economy: a comparison of independent forecasts HM Treasury (June 2013)
ISM Manufacturing Report on Business® PMI History Institute for Supply Management
- What are forecasters expecting to happen to economic growth in the coming months? Why?
- What factors determine investment? Why has it fallen so substantially in the UK?
- Explain what is meant by the ‘accelerator’. Is the rise in consumption likely to lead to an accelerator effect and, if so, what will determine the size of this effect?
- Why have exports not grown more rapidly despite the depreciation of sterling after 2007?
- What will determine the rate of potential economic growth in the UK economy? How will a rise in real GDP driven by a rise in consumption impact on potential GDP and potential economic growth?
- What supply-side policies would you recommend, and why, in order to increase potential economic growth?
The latest growth data for the UK is somewhat difficult to interpret. It’s positive, but not that positive. The Conservatives say it shows that the economy is moving in the right direction. Labour suggests it is evidence that the Coalition’s policies are not working. With a return to positive growth, the UK has avoided the triple dip recession and here we take a closer look at the economic performance of other key nations.
In the final quarter of 2012, the US economy grew at 0.4%, but in the 3 months to March 2013, economic growth in America picked up to 2.5%. Consumer spending significantly increased, growing at an annualized rate of 3.2%, according to the Commerce Department. This figure helped boost the growth rate of the US economy, as consumer spending accounts for around two thirds of economic activity.
However, the growth figure was lower than expected, in part due to lower government spending. Furthermore, there are suggestions that the positive consumer spending figures are merely a positive blip and spending will fall as the US economy moves through 2013.
If this does prove to be the case in the USA, it will do little to further boost UK economic growth, which was recorded at 0.3% for the first 3 months of 2013. The Chancellor has said that the growth figures are encouraging and are evidence that the government’s policies are working.
Today’s figures are an encouraging sign the economy is healing … Despite a tough economic backdrop, we are making progress. We all know there are no easy answers to problems built up over many years, and I can’t promise the road ahead will always be smooth, but by continuing to confront our problems head on, Britain is recovering and we are building an economy fit for the future.
While the USA and UK have recorded positive growth, expectations of growth throughout Europe remain uncertain. Spain has revised its forecasts downwards for 2013, expecting the economy to shrink by over 1%. Even after 2013, growth is expected to remain very weak, forecast to be 0.5% in 2014 and 0.9% in 2015. To make matters worse, Spain’s unemployment continues to move in the wrong direction, with data for the first 3 months of 2013, recording an unemployment rate of 27.2% – the highest on record.
However, it’s not just Spanish unemployment that is on the rise. Figures for March show that in France, 3.2 million people were out of work, a 1.2 % rise compared to February. In the UK, 2.56 million people were recorded as unemployed, representing just under 8% of the working population. The German economy continues to outperform its European partners, but eurozone growth continues to look weak for the rest of 2013.
Despite much bad news in Europe, growth in other parts of the world remains buoyant. South Korea has recorded economic growth that is at its highest level in 2 years. Economic growth was just under 1%, but construction and investment both increased, perhaps a sign of an economy starting its recovery.
The Chinese economy has seemed relatively unaffected by the economic downturn, yet its economic growth has slowed. Averaging over 10% per annum for the last decade, the growth for January – March 2013 was only 7.7%. This is a decline on the previous 3 months and is lower than expected. If the Chinese economy does begin to slow (relatively speaking), this could present the global economic recovery with an unwelcome obstacle.
Many Western economies are reliant on exports to boost their growth figures and with such high demand in China, this is a key export market for many countries. If the Chinese economy continues to slow, consumer spending may even fall and this could mean a reduction in Chinese imports: that is, a reduction in other countries’ exports to China. However, for China’s competitors, the news is better, as with China’s move from a low to middle-income country, other countries will now see an opportunity to grasp a competitive advantage in the production of cheaper products. David Rees from Capital Economics said:
Trade data show that Chinese imports of commodities, and industrial metals in particular, have been falling in recent months … That is bad news for those emerging markets in Latin America, the Middle East, and Africa that predominately export commodities to China. It is not all bad news … To the extent that China’s structural slowdown reflects its transition from low to middle-income status, opportunities will present themselves for other EMs as China moves up the value chain. We are particularly upbeat on the manufacturing-based economies of South East Asia, along with Mexico, Poland, and Turkey.
News is better in Japan, where growth forecasts have been raised to 2.9% over the same period and the economy is expected to grow by 1.5% throughout both 2013 and 2014. Furthermore, suggestions that inflation may also reach 0.7% have boosted confidence. This might be the end of Japan’s troubles with deflation.
So, we have something of a mixed picture across the world, although the IMF predicts a global rate of growth of 3.5% for 2013, which would be an improvement on 2012 figures. The following articles consider the global situation.
Spain slashes economic growth forecast Sky News (26/4/13)
UK avoids triple-dip recession with better than expected 0.3% GDP growth The Guardian, Heather Stewart (26/4/13)
US economy grows 2.5% on buoyant consumer spending BBC News (26/4/13)
Poor French and Spanish jobs data but UK economy returns to growth – as it happened The Guardian, Graeme Wearden and Nick Fletcher (25/4/13)
UK economy avoids tiple-dip recession with 0.3pc GDP growth The Telegraph, Szu Ping Chan (25/4/13)
South Korea economic growth hits two year high BBC News (25/4/13)
S. Korea economy grows at the fastest pace in two years Bloomberg, Eunkyung Seo (25/4/13)
Spain revises down its economic forecast BBC News (26/4/13)
US economy sees broad growth Financial Times, Robin Harding (25/4/13)
Germany’s private sector shrinks as Eurozone decline continues – as it happened The Guardian, Graeme Wearden and Nick Fletcher (23/4/13)
China economic growth lower than forecast BBC News (15/4/13)
China’s slowing economy: what you need to know Bloomberg Business Week, Dexter Roberts (25/4/13)
Modest Growth Pickup in 2013, Projects IMF International Monetary Fund (23/1/13)
- How is economic growth measured?
- What is meant by a triple-dip recession?
- What has caused the small increase in growth in the UK? Do you think this signifies the start of the economic recovery?
- In the USA, what has caused the growth rate to reach 2.5% and why is it lower than expected?
- Why are growth rates in countries across the world relevant for UK forecasts of economic growth?
- Which factors have allowed the Chinese economy to achieve average growth rates above 10% for the past decade?
- Using an AD/AS diagram, illustrate the desired impact of the Coalition’s policies to boost economic growth.
- With unemployment rising in countries like Spain and France, how might Eurozone growth be affected in the coming months?
- Japanese growth is looking positive and inflation is expected to reach about 0.7%. Why is it that Japan has suffered from deflation for so many years and why is this a problem?