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From optimism to pessimism

In a time of uncertainty, it is logical to include both optimistic and pessimistic scenarios for projections. Thus, WESP offered three forecasts for global growth for 2009: (a) baseline estimate of 0.9%, a pessimistic scenario in which global growth becomes negative (-0.4 %) and an optimistic scenario of 1.6% global growth in 2009.

Anis Chowdhury and Iyanatul Islam
THERE is no doubt that the world is heading towards the worst economic crisis since World War II. In purchasing power parity terms, according to the IMF, global growth in 2009 will be a meagre 0.5%, and measured in terms of market exchange rates, global economywillshrink
IMF’s World Economic Outlook (WEO) accepts the severity of the crisis that originated in a small segment of the US financial sector. In November 2008, it projected a global growth rate of 2.2% for 2009. The IMF had the most optimistic projections relative to other multilateral agencies and private sector estimates.
It took one and a half years for the IMF to realise that this crisis would soon engulf the world. A month before the first tremors of the US ’’sub-prime" mortgage crisis were felt, the IMF noted: "The
strong global expansion is continuing, and projections for global growth in both 2007 and 2008 have been revised (upwards)."
A little over a year later, the IMF revised its projections downwards because the world economy was heading towards a major recession. The graph shows how the IMF changed its projections for 2009 between July 2008 and January 2009.
Three months before the crisis began in August 2007, the OECD released its 2007 World Economic Outlook, in which it commented:
"In its Economic Outlook last autumn, the OECD took the view that the US slowdown was not heralding a period of worldwide economic weakness, unlike, for instance, in 2001. Rather, a smooth' rebalancing was to be expected, with Europe taking over the baton from the United States in driving OECD growth.
Recent developments have broadly
confirmed this prognosis. Indeed, the current economic situation is in many ways better than what we have experienced in years. Against that background, we have stuck to the rebalancing scenario. Our central forecast remains indeed quite benign: a soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China and India. In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation
and falling unemployment. (OECD World Economic OutlookVol 81 p. 7)"
There seems to be no credible reason for such optimism. Signs of an impending crisis were visible at least since 2006. The Department of Economic and Social Affairs of the United Nations warned:
"The possibility of a disorderly adjustment of the widening macroeconomic imbalances of the major economies is a major risk which could harrri the stability and growth of the world economy... A reversal in house prices...will heighten
the risk of default and could trigger bank crises... A sharp fall in house prices in one of the major economies could, then, precipitate an abrupt and destabilising adjustment of the global imbalances (WESP, 2006, ppv-vili)."
Again in 2007 WESP warned: "The possibility of a more severe downturn in housing markets represents a significant downside risk to the economic outlook... Current-account imbalances across regions and countries have widened further in 2006...The indebtedness of the United States has deepened to a level which more seriously calls into question the sustainability of current constellation of global imbalances (WESP 2007, p. vi)."
The supposed guardians of the world economy simply ignored these warnings and projected a rosy picture, and at worst a "soft landing."
WESP not only had the correct analysis of the underlying risks for the world economy, it also seems to have the more realistic projections for the 2009 growth. When, in November 2008, the IMF was projecting a global growth rate of2.2% for 2009, WESP projected a base-line growth rate ofO.9%.
In a time of uncertainty, it is logical to include both optimistic and pessimistic scenarios for projections. Thus, WESP offered three forecasts for global growth for 2009: (a) baseline estimate of 0.9%, a pessimistic scenario in which global growth becomes negative (-0.4 %) and an
optimistic scenario of 1.6% global growth in 2009.
In the optimistic scenario, a coordinated fiscal stimulus equivalent to 1.5% to 2.0% of global GDP will be implemented in 2009, while financial markets will recover in response to the monetary stimulus undertaken by the advanced economies. The baseline projection incorporates the positive impact of monetary stimulus and state-led support for financial institutions in the developed world, but does not assume any additional fiscal stimulus.
The WESP estimates provide a range of scenarios that seem to be missing in the projections offered by the IMF and the World Bank. WESP projections show that global growth will be anaemic.
Duetsche Bank (DB) predicts that global growth will barely be above zero (0.2 %) for 2009. A recent issue of the RGE Monitor claims that US GDP growth will be -3.4 % in 2009 (RGE Monitor Newsletter, January 7,2009).
Given the dismal track record of the IMF and the OECD, one would have thought that their credibility would be in tatters. Sadly, this is not the case. Instead, we seem to seek counsel about the crisis from the very organisations that could not foresee it.
Anis Chowdhury is Professor of Economics, University of Western Sydney and lyanatul Islam is Professor of International Business, Griffith University, Australia