IMF’s world economic outlook

According to the IMF World Economic Outlook (WEO), global growth is slowing.  In the IMF’s words:

Projected global growth, at 3.3 and 3.6 percent in 2012 and 2013, respectively, is weaker than in the July 2012 WEO Update, which was in turn lower than in the April 2012 WEO.

This revised-downward growth forecast is also lower than their 2011 forecasts for 2013.  It seems like the IMF might be repeatedly making the same mistake. So here’s a question, could they be doing the same again this year?

According to the IMF, their new growth forecast depends on two critical assumptions. To quote:

The first assumption is that, consistent with the October 2012 GFSR baseline scenario, European policymakers take additional action to advance adjustment at national levels and integration at the euro area level (including timely establishment of a single supervisory mechanism). As a result, policy credibility and confidence improve gradually while strains remain from elevated funding costs and capital flight from the periphery to the core countries. If these policy actions are not taken, the WEO forecast may be disappointed once again and the area could slide into the GFSR’s weak policies scenario, which is described in further detail below.


The second assumption is that U.S. policymakers avoid the fiscal cliff and raise the debt ceiling, while making good progress toward a comprehensive plan to restore fiscal sustainability.

The IMF is saying that the failure to implement policy (implementation risk) is likely to turn a pessimistic growth forecast into an even worse reality. And, unfortunately, there is good reason to think that this is true.  Both of the IMF’s assumptions require large irreversible political investments. The decisions are large because politicians’ career prospects in Europe and the US depend on whether they make the right decision. Make the wrong one and your political career could be over. As we’ve discussed before, that means that the option of waiting is valuable — you could be better off delaying that decision until more information becomes available (like outcome of the US elections in November, or whether the economy will pick up in Europe). So politicians wait and the IMF’s weak policies scenario comes to fruition.

The IMF goes to great length to explain that we are living in very uncertain times and that risks are high. If you apply the theory of options, the outlook for the global economy doesn’t look so good.



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