The age of diminishing expectations | Oct 7th 2014

THE International Monetary Fund has just released the full update to its fall World Economic Outlook, which includes its latest forecast for global growth. The picture is not pretty:

Back in January the IMF thought the world might manage growth of 3.7% this year. That dropped to 3.6% in April, to 3.4% in July, and to 3.3% in the new report. If growth is written down any more then this year’s performance will come in below that in 2013, of 3.3%, making 2014 the fourth consecutive year in which global output has slowed relative to the prior year’s showing. The steady deterioration in the global economy’s performance is remarkable for several reasons, including just how long it has taken the world to catch on to the trend. In a box in the first chapter of the WEO the IMF acknowledges that even though its forecasts have gotten ever gloomier since 2010 they have not gotten gloomy enough, fast enough. From 2011 to 2014, the IMF notes, its year-ahead forecasts were 0.6 percentage points too optimistic on average. That doesn’t bode well for the remainder of this year or for next; at the moment the IMF forecasts growth of 3.8% in 2015.

The IMF’s downward revisions are broad-based. Both Europe and Japan are expected to grow much less this year than was previously forecast (and both received downward nudges to their 2015 projections as well). Emerging markets also come in for rough treatment; indeed, overall GDP growth in emerging markets is now forecast to be just 4.4% in 2014, just 2.6 percentage points better than advanced economies. Interestingly, it is Latin America, the Middle East and sub-Saharan Africa that get the big revisions this time around. Brazil’s growth has been written down a full percentage point; it is now expected to expand by just 0.3% in all of 2014.

The news could get worse in future, the IMF reckons. Its current projections assume sensibly accommodative fiscal and monetary policy, as well as a decline in geopolitical tensions. That is disconcerting. The growth slowdown since 2010 is already one of the most dramatic of the last 40 years, comparable to the swoons that accompanied the Latin American crises of the late 1980s and the Asian crisis of the late 1990s (though not as large as the drop in 2008-9). Officials in Washington, gathered for the autumn meetings of the World Bank and IMF, will be hoping the outlook shocks governments into decisive action to support global growth. Unfortunately, policy makers seem to be growing inured to bad economic news.

via The Economist

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