The Official Upside Scenario

December 11, 2008 4:30 PM

The IMF is signalling that it will further revise down its global growth forecast. This is after cutting the forecast sharply in October and again in November. Their latest published view is growth in 2009 will be 2.2 percent year-on-year, and 2.4 percent fourth quarter on fourth quarter. This view is dated November 6, 2008, so you should think of it as reflecting what the IMF knew at the end of October.

I obviously can't predict exactly what the next forecast will look like, as there is a lot of economic ground to cover between now and mid-January. But here are some considerations to keep in mind.

First, the World Bank came out this week with its Global Economic Prospects forecast. There was a fair amount of attention for their headline number of 0.9 percent growth for 2009, but this was essentially the same as the IMF's previous number from the end of October. If you dig down through the IMF's table, at the end of all the growth numbers there is a row for "world growth based on market exchange rates," with 1.1 percent for 2009 (annual average; the fourth column). So the Bank basically reduced the IMF's global forecast by the minimum plausible amount, given that the last six weeks were so nasty.

(Aside: The IMF's core business is market exchange rates, while the Bank is in the business of calculating purchasing power parities, or PPPs. Yet the Bank's headline growth numbers use market exchange rates to weight national growth rates, while the IMF uses PPPs. Don't ask.)

Second, there is information in the Bank's forecast for 2010. The Fund will publish its 2010 forecast only in January, and it doesn't have to follow the Bank's lead, but the numbers do indicate what key stakeholders are thinking. And the answer is: a rapid recovery, with annual average global growth of 3 percent in the Bank's headline number, which would be equivalent to over 4 percent in the Fund's measure. And remember that annual averages are very much affected by what happens early in the previous year and in the first quarter of the year being "measured" (so 2009 annual averages will likely fall as the fourth quarter of 2008 seems likely to be so bad). Basically, the Bank is forecasting a rapid rebound in global growth—pretty close to what we had in 2007.

Third, where does the recovery come from? To get at this, you have to use the interactive feature in the Bank's table, which is nice in principle but seems to run slow and is annoyingly vague on which countries are in some of the categories. Industrialized countries ("high income" in Bank terminology) rebound to +2 percent in 2010 (after contracting by only -0.1 percent in 2009; in comparison, this group grew 2.6 percent in 2007); the eurozone grows at +1.6 percent (after a fall of -0.6 percent in 2009, and 2.6 percent in 2007); East Asia and Pacific grows at +7.8 percent (after a pretty strong 6.7 percent in 2009, and 10.5 percent in 2007), and developing countries as a whole grow at +6.1 percent (after slowing to 4.5 percent in 2009).

So it's a recovery across the board, probably led by the United States but with the eurozone close behind. And the fourth quarter on fourth quarter for 2010 implicit here is likely even more positive.

Now I completely agree that there is an upside scenario in the current situation. But the Bank has produced an optimistic baseline scenario (ask yourself: what is the upside to this, 6 percent growth in 2010?) This presumably reflects both developing countries wanting to stay positive, e.g., about commodity prices (and justify financing their current account deficits, rather than adjusting) as well as the G-7's global strategy, which to date can be summarized as: Don't Worry, Be Happy.

Of course, this could happen. But at least for this Bank view, as they say in the forecasting business, the risks are mostly to the downside.

Adapted from a posting in Mr. Johnson's blog, Baseline Scenario.