You know it’s a slow news day in the financial world when think tanks’ and supranationals’ economic forecasts dominate. And dominate they did Monday, as the IMF, Economic Cycle Research Institute (ECRI) and Ernst & Young released their latest (occasionally conflicting) economic outlooks.
In general, we wonder why these outfits’ forecasts get so much attention—none have proven especially prescient over time, and their commentary typically doesn’t have much earthshattering forward-looking insight. In fact, we found several other news items more interesting—like the mounting evidence Kim Jong Un purged a top North Korean general (and got married!); a French town’s wacky plan to retake Britain’s crown jewels; the slipping rule of law in Romania; Maine’s great lobster glut and a clever British editorial denouncing rain. Other stories seem far more compelling from an economic standpoint—like the ECB’s newfound willingness to make “senior” bondholders (including the ECB) in Spanish banks take losses; Hungary’s resumed negotiations for EU/IMF aid; the German parliament’s upcoming vote on Spain’s bank bailout and the EU’s debate over dairy market intervention (excellent editorial here).
And yet, those pesky forecasts seemingly won the day as they took headlines by storm, so let’s take a look.
The IMF cut its global growth forecast by 0.1 percentage point to 3.5%, citing slowing growth in the US, China, Brazil and India and the eurozone’s ongoing issues—all of which have been widely discussed for some time. The IMF’s chief economist said the slower forecast reflected folks’ “darkened” view of the world, but to us, 3.5% growth for a global GDP that logged all-time highs in 2011 doesn’t seem dark. Consider: The IMF pegged nominal global GDP at $78.9 trillion in 2011—3.5% growth would be an additional $2.76 trillion in output.
The IMF cut the UK’s forecast, too, from April’s 0.8% prediction to 0.2%. This isn’t too surprising, since recent data suggest Britain’s recession may have continued in Q2. Most interpreted the report as negative due to the downward revision, even though 0.2% 2012 GDP growth would mean decent growth in the second half. Yet, funnily, Ernst & Young’s report forecasting flat British GDP growth this year—also a negative revision—garnered an upbeat reaction precisely because it anticipated a nice second half.
Also conflicting are perceptions of US growth. The IMF forecasts 2% growth this year, also a mere 0.1 percentage point below April’s forecast. This isn’t a gangbusters growth rate, but it’s still growth and faster than 2011’s 1.7%. Or, in dollar terms, nominal US output would rise over $300 billion in 2012. Adding $300 billion to our all-time-high-and-counting GDP sure seems expansionary. But ECRI’s proprietary leading US economic indicator has been negative recently, and the think tank now believes the US is, in fact, in recession. They acknowledge GDP’s growing but claim unemployment, retail sales and personal incomes paint a bleaker picture. Which seems odd. Unemployment—a late-lagging indicator—is steadily improving (though it remains elevated). Real and nominal personal incomes are up year to date. Retail sales have stalled a bit on a monthly basis, but year-over-year comparisons are positive. Add in other recent positive data, like expanding factory orders, trade and regional manufacturing reports, and it’s tough to find evidence of a shrinking US economy.
These are just examples of why we typically suggest taking such forecasts with a big grain of salt. Looking at a wide array of actual data and macroeconomic trends usually yields a more accurate perspective—like a growing US; a slowing China that seems set to reap the benefits of fiscal and monetary stimulus and some economic liberalization; a eurozone where pockets of strength may help counterbalance the weaker periphery and a UK where policymakers are taking creative steps to address economic sluggishness.