Wednesday 18 April 2012

Good News... Bad News... (II)

The good news?

The IMF released overnight its World Economic Outlook: essentially, "some optimism has returned", according to the BBC News Service. (See here)

According to the IMF the global economy is expected to grow by 3.5% in 2012 (0.2% more than last January's update). For 2013, growth is expected to reach 4.1% (from 3.9%).

Growth will not be uniform, however:
" 'With the passing of the crisis, and some good news about the US economy, some optimism has returned,' the IMF said.
"But it added the 'risk of another crisis is still very much present'.
"As if to underline that point, Spain is the only Eurozone country whose growth has been revised even lower for 2012.
"The IMF expects Spain to contract by 1.8% in 2012, compared with its previous prediction of a contraction of 1.6%".
Overall, in Europe "the 17 countries of the eurozone are expected to shrink this year, but less than previously forecast, by 0.3% rather than 0.5%".

Australia's growth rate was revised down, too: a forecast of 3%, versus 3.3% last September.

Prompted for comments, Federal Treasurer Wayne Swan (Labor), ahead of his visit to the G20 Finance Meeting next weekend:
" 'The IMF forecasts show that the Australian economy will outperform every other major advanced economy this year and next,' he told [ABC Radio show] AM.
" 'I think a surplus in the conditions that Australia finds itself is the responsible thing to do,' he said.
" 'We have an economy which is growing around trend, we have unemployment at 5.2% and we have a huge investment pipeline'.
" 'This is the best defence for Australia at a time of global uncertainty, but it also provides the maximum opportunity for the Reserve Bank to reduce interest rates if they desire'."
(See here)
Opposition leader Tony Abbott:
" 'It (the report) forecasts 3% for the current financial year and it looks like we are going to get 2 per cent,' Mr Abbott said.
" 'This is an underperforming economy and it's underperforming because of the poor economic management of the current government.'
"He says it is important to return the budget to surplus but does not agree with the government's methods.
" 'The way to get back to surplus is not to increase taxes, which is what this government is doing,' he said.
" 'The way to get back to surplus is to eliminate wasteful and unnecessary government spending'."
So, there you have it, according to Abbott: the Labor fiscal SORE+ dependent on the mining and carbon taxes revenue and social spending freeze is bad; a Coalition SORE+ (say, SORE+ v2) based on massive federal public servants sackings and social spending freeze is good.

The bad news?

Forecasting is a risky business. Even the best, most objective and competent forecasters often end up looking like fools.

But the IMF is not the best forecaster. In fact, it has been shown the IMF is a particularly incompetent forecaster, and one whose objectivity might be doubtful, to put it mildly.

David Rosnick and Mark Weisbrot, in a 2007 report analysing the forecasting performance of the IMF in the cases of Argentina and Venezuela, concluded:
"The IMF's large and repeated errors in projecting GDP growth in Argentina since 1999 strongly suggest that these errors were politically driven. The large overestimates occurred during the country's 1998-2002 depression, when the IMF was lending billions of dollars to support policies that ultimately ended in an economic collapse. Similarly, the underestimates took place at a time when the IMF had an increasingly antagonistic relationship with the Argentine government, and opposed a number of its economic policies. It is worth noting that despite the IMF's pessimism about Argentina's recovery from the beginning, Argentina has now completed a five year economic expansion with the fastest growth in the Western Hemisphere, with real GDP (adjusted for inflation) growth of 47 percent.
"As this paper shows, the IMF's public documents and statements regarding Argentina lend support to the idea that its errors were related to political considerations. The repeated underestimates of Venezuela's GDP growth raise further questions in this regard.
"The IMF's economic projections, including those in its Spring and Fall World Economic Outlook, are widely disseminated and used throughout the world. There are generally taken to be based on sound methodology and economic analysis, and free from political influence. The forecast errors described in this paper raise serious questions as to whether this is always the case."
(Download the report from here)
18-04-2012: That came in quick! Is this the first crack in the IMF forecast?

"Italian PM Mario Monti to cut economic growth forecasts for 2012". The Telegraph (UK). 17-04-2012 (UK time).

The IMF forecasts appear to be based on the GDP estimates for 2011. For 2011, the World Economic Outlook seemed to have considered that Italy's GDP would shrink by 0.4% (see here, chapter 2).

However, now, according to The Telegraph, PM Mario Monti could be talking of a 1.2% contraction for 2011.

Italy is the third economy in the Eurozone and the fourth in Europe.

21-04-2012: Bill Mitchell on the December 13, 2011 IMF forecast release:
"The latest IMF medium-term forecasts for Greece reveal a staggering failure by that institution to understand causality and the impacts that their austerity programs have on real economies. Without a blush, the IMF presented the world yesterday with revised forecasts for Greece which reveal their previous forecasts will be around 100 per cent wrong over just over a 6-month horizon."
I have nothing to add.

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