Notes on the IMF World Economic Outlook, June Update

On the 8th of January this year, this is how I opened the post for that day:

“Five links today to articles that were written recently about how things might pan out in 2020. Sticking one’s neck out and making predictions is difficult enough for relatively small issues – trying to guess where the global economy might end up is something I would never want to do. Kudos to those who try!”

Note to self: forecasting the global economy is an impossible task. Never forget!

All that being said, the International Monetary Fund came up with a June update to their April forecast. And (surprise, surprise) it doesn’t make for pleasant reading. What follows are passages I highlighted while reading the PDF, and in some cases, my comments below.

  • “Global growth is projected at –4.9 percent in 2020, 1.9 percentage points below the April 2020 World Economic Outlook (WEO) forecast. The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast.”
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    My guess (not a forecast) is that this will be revised downward further still. I hope I am wrong. My reasons for being so pessimistic? One, I think we still underestimate how difficult it will be to reopen, and even if the economy reopens, parts of the world will need to enter lockdowns of varying intensity for a long time to come. Planning with such uncertainty in mind will prove to be difficult. Also, rebuilding supply chains while not prioritizing for efficiency is desirable, yes. But it’s not easy!
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  • Also, uh, China will not take any attempted rebuilding of these supply chains lying down. Ask us Indians about it!
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  • “The adverse impact on low-income households is particularly acute, imperiling the significant progress made in reducing extreme poverty in the world since the 1990s.”
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    The distributional consequences are going to be bad, and quantifying them will keep economists occupied for a very long time. But dealing with this is not going to be easy.
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  • “As with the April 2020 WEO projections, there is a higher-than-usual degree of uncertainty around this forecast.”
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    Duh.
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  • “For economies struggling to control infection rates, a lengthier lockdown will inflict an additional toll on activity.”
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    This applies to us here in India, and again, dealing with this is not going to be easy.
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  • “The pattern reflects a unique combination of factors: voluntary social distancing, lockdowns needed to slow transmission and allow health care systems to handle rapidly rising caseloads, steep income losses, and weaker consumer confidence”
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    Truly a crisis like no other, this one. As I mention in tomorrow’s post, this is neither a supply not a demand crisis. Macroeconomics will have to, yet again, update itself.
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  • “Nonetheless, according to the International Labour Organization, the global decline in work hours in 2020:Q1 compared to 2019:Q4 was equivalent to the loss of 130 million full-time jobs.”
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  • “The synchronized nature of the downturn has amplified domestic disruptions around the globe. Trade contracted by close to –3.5 percent (year over year) in the first quarter, reflecting weak demand, the collapse in cross-border tourism, and supply dislocations related to shutdowns (exacerbated in some cases by trade restrictions).”
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    One of my biggest worries is that politics, both domestic and international, will likely make this much, much worse in the days to come.
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  • “An important assumption is that countries where infections have declined will not reinstate stringent lockdowns of the kind seen in the first half of the year, instead relying on alternative methods if needed to contain transmission (for instance, ramped up testing, contact tracing, and isolation).”
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    Neither citizens nor governments – at least in India – have the appetite for a lockdown that was as strict or as long as the one that lasted through until the end of May. In a sense, we have used up that particular strategy. Limited lockdowns, and intensive ones in those areas where there are outbreaks, will be the way forward. This, unfortunately, will not be as effective, and we will therefore live in a stop-start world for a while.
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  • “For the first time, all regions are projected to experience negative growth in 2020. There are, however, substantial differences across individual economies, reflecting the evolution of the pandemic and the effectiveness of containment strategies; variation in economic structure (for example, dependence on severely affected sectors, such as tourism and oil); reliance on external financial flows, including remittances; and pre-crisis growth trends.”
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    Same cause for the disease, in other words, but the treatment must necessarily be different. Not just across countries, but also within them. What works for Maldives will not work for India, for example, and what works for Goa won’t for Maharashtra. An argument, if you will, for policy to operate at more local levels.
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  • “Moreover, with widespread school closures in about 150 countries as of the end of May, the United Nations Educational, Scientific and Cultural Organization estimates that close to 1.2 billion schoolchildren (about 70 percent of the global total) have been affected worldwide. This will result in significant loss of learning, with disproportionately negative effects on earnings prospects for children in low-income countries.”
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    Left unstated is the social impact of being cooped up at home, and on the entire family, not just children. The economic consequences – now and in the future – will be important.
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  • “Development of a safe, effective vaccine would lift sentiment and could improve growth outcomes in 2021, even if vaccine production is not scaled up fast enough to deliver herd immunity by the end of 2021.”
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    Last mile delivery of vaccines will take longer than most people think, and an improvement in “sentiment” might lead to unanticipated consequences.
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  • “Beyond the pandemic, policymakers must cooperate to address the economic issues underlying trade and technology tensions as well as gaps in the rules-based multilateral trading system. The eventual recovery from the COVID-19 crisis would be endangered without a durable solution to these frictions.”
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    Agreed! But color me sceptical on this panning out well.

RoW: Links for 8th January, 2020

Five links today to articles that were written recently about how things might pan out in 2020. Sticking one’s neck out and making predictions is difficult enough for relatively small issues – trying to guess where the global  economy might end up is something I would never want to do. Kudos to those who try!

  1. “As tempting as it is to dwell on current financial and macroeconomic conditions, doing so risks obfuscating a key element in the outlook for the future. There is a curious contrast between the relative clarity of expectations for the near term and the murkiness and uncertainty that comes when one extends the horizon further – say, to the next five years.
    […]
    Moreover, in the years ahead, the United States, having notably outperformed many other economies, will decide whether to continue disengaging from the rest of the world – a process that is at odds with its historic position at the center of the global economy.”
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    Mohamed A. El-Erian wrote this article about the outlook for the global economy in the middle of December 2019, and well, things change quickly.
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  2. “The uptick in global growth for 2020 is driven by emerging market and developing economies that are projected to experience a growth rebound to 4.6 percent. About half of this rebound is driven by recoveries or shallower recessions in stressed emerging markets, such as Argentina, Iran, and Turkey, and the rest by recoveries in countries where growth slowed significantly in 2019 relative to 2018, such as Brazil, India, Mexico, Russia, and Saudi Arabia. There is, however, considerable uncertainty surrounding these recoveries, especially when major economies like the United States, Japan, and China are expected to slow further into 2020.”
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    This was written in October 2019, by Gita Gopinath. The IMF’s prognosis is one of a subdued recovery for the global economy as the best case scenario.
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  3. “For the professional prognosticators and market mavens of Wall Street and beyond, there is at least one easy prediction to make about the next 12 months: Investors are going to earn less. A lot less, probably.“The double-digit returns of 2019 will be hard to repeat” is a phrase littering almost every investment outlook for global markets in 2020. Despite the trade war, political turmoil and more, virtually all major assets just posted a once-a-decade performance, and even uber-bulls know the chances of repeating the feat are slim.”
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    Bloomberg thinks financial markets the world over will struggle to put in the kind of performance that we saw in 2019. A good summary of a lot of global outlooks.
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  4. “In 2020 Asia’s GDP will overtake the GDP of the rest of the world combined. By 2030, the region is expected to contribute roughly 60% of global growth. Asia-Pacific will also be responsible for the overwhelming majority (90%) of the 2.4 billion new members of the middle class entering the global economy.The bulk of that growth will come from the developing markets of China, India and throughout South-East Asia and it will give rise to a host of new decisions for businesses, governments and NGOs. The pressure will be on them to guide Asia’s development in a way that is equitable and designed to solve a host of social and economic problems.”
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    The World Economic Forum points to the fact (?) that Asia will produce more economic output than the rest of the world combined this year.
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  5. “Just as the world economy was stabilizing after its worst performance in a decade, a U.S. airstrike in Iraq that killed one of Iran’s most powerful generals is a jolting reminder of how fragile the outlook remains.A tentative trade agreement between the U.S. and China had buoyed expectations that global growth would start to rebound this year. Business confidence has slowly been improving as key manufacturing gauges show signs of bottoming out.

    Now, the U.S.-Iran flare-up could nip any positive sentiment in the bud.”
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    But, well. Happy new year!

Links for 24th April, 2019

  1. “Really? When is the last time you ran a search with DuckDuckGo? Too often, he seems to be stretching the evidence. He argues that, given the social aspects of the workplace, “companies are actually responsible for some of our most important relationships.” But that’s a function of work — not of corporate life. People at nonprofits make friends, too. Cowen asserts in defense of Amazon, “My options as a book consumer never have been better.” He includes as evidence of a competitive book market the option (which he doesn’t condone) of “illegal downloads of free PDFs.” Jeff Bezos must rue such defenders. (Bezos founded Amazon and owns The Washington Post.)”
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    Roger Lowenstein reviews Tyler Cowen’s latest book. I myself have not read it yet, but the review was interesting to me, in particular this excerpt about illegal PDF’s and how they encourage competition.
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  2. “Alwyn’s related analysis of published studies is even more striking. He shows that, in a sample of 1359 IV regressions in 31 papers published in the journals of the American Economic Association,
    “… statistically significant IV results generally depend upon only one or two observations or clusters, excluded instruments often appear to be irrelevant, there is little statistical evidence that OLS is actually substantively biased, and IV confidence intervals almost always include OLS point estimates.” ”
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    Econometric nerds/students only (consider yourself warned) – but IV isn’t as great as it is made out to be. Occam’s razor is massively ignored in econometrics.
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  3. “The Fiscal Affairs Department and the Institute for Capacity Development of the IMF are pleased to announce that the online course on Public Financial Management (PFM) will relaunch on May 1, 2019 and remain open year-round. In its two previous offerings, this free online course has been taken by more than 2,200 participants in 194 countries, with very high satisfaction rates. Taught by more than 15 experts of the Fiscal Affairs Department, the course is open for government officials, staff of bilateral and multilateral development agencies, civil society organizations, parliamentarians, academics and the general public. The course has been updated in 2019 to reflect the revisions brought to IMF’s PFM standards and tools and adopted in the last twelve months – namely the Public Investment Management Assessment (PIMA) framework and the Natural Resource Management pillar of the Fiscal Transparency Code (FTC).”
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    You might, as a student of economics or policy making, want to consider taking this course.
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  4. “So why, then, does the government tax, under the MMT view? Two big reasons: One, taxation gets people in the country to use the government-issued currency. Because they have to pay income taxes in dollars, Americans have a reason to earn dollars, spend dollars, and otherwise use dollars as opposed to, say, bitcoins or euros. Second, taxes are one tool governments can use to control inflation. They take money out of the economy, which keeps people from bidding up prices.And why does the government issue bonds? According to MMT, government-issued bonds aren’t strictly necessary. The US government could, instead of issuing $1 in Treasury bonds for every $1 in deficit spending, just create the money directly without issuing bonds.”
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    Yet another explainer of MMT – it’s counterintuitive (at least to me), and I’m still not sure it makes sense and will work – but I understand it better than I did before upon reading this article.
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  5. “This is an issue for economics too: the construction of the deflators used to turn nominal pound or dollar GDP into ‘real’ GDP, on which so much policy hangs, relies on a theory of constant, known preferences which determine the utility of consumption, and yet modern economic growth is all about creating wants for new goods and services for which preferences have to be created. So at a time of rapid innovation it is not at all clear what the deflators and ‘real’ GDP measures are measuring.”
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    Diane Coyle reviews a book that helps us understand Amartya Sen’s work better. I found this excerpt above quite interesting.