Thursday 19 Jul 2018 | 10:28 | SYDNEY
Thursday 19 Jul 2018 | 10:28 | SYDNEY

Farewell global growth, hello political fallout


Mark Thirlwell

29 January 2009 13:07

We’ve noted before on The Interpreter the perils of forecasting. Nevertheless, yesterday’s release by the IMF of its latest World Economic Outlook (WEO) Update merits a look. 

The Fund now thinks global growth in 2009 will be a meagre 0.5%, which would be its lowest rate since the Second World War. That’s a downgrade of about 1.75 percentage points from the November 2008 WEO Update, which in turn had announced a cut in the IMF’s growth forecast for 2009 by 0.75 of a percentage point relative to the previous October 2008 WEO projections. 

In other words, the economic outlook keeps getting gloomier. The sharp downward revisions in the latest Update reflect the fact that world production and trade basically fell off a cliff towards the end of last year, as this chart, lifted from the WEO Update, illustrates:

Note also that the 0.5% growth forecast cited above is based on aggregating world output on a purchasing power parity basis, which gives a higher weight to faster-growing emerging markets. When it does the calculation using market exchange rates, the Fund thinks the world economy will actually shrink by 0.6% this year.

How does this downturn compare with previous experiences? The Fund reckons output in the world’s advanced economies is likely to shrink by 2% this year. This would imply a cumulative output loss (relative to potential) equivalent to that experienced in the 1974-75 and 1980-82 downturns. Emerging markets and developing countries, taken overall, are still expected to deliver positive growth, but at a sharply lower rate than last year: China, for example, is forecast to see its growth drop from 9% last year to 6.7% this year, and India to see growth fall from 7.3% in 2008 to 5.1% in 2009.

If all that isn’t gloomy enough, the Fund is also warning of the risks of deflation. Carmen Reinhart and Ken Rogoff’s latest thinking provides no comfort either: their review of international experience with past episodes of severe banking crises suggests we should expect ‘profound declines in output and employment’.

As global growth vanishes, the political consequences of economic disaster are starting to make themselves felt. Perhaps the most dramatic example to date has been the fall of Iceland’s coalition government, which collapsed at the start of this week. But political unrest is rising elsewhere too. Since Iceland’s was also the first economy to be crushed by the financial crisis, it is perhaps not surprising that many analysts see the country performing the same kind of ‘canary in a coal mine’ function for the political fallout. 

This article on the Foreign Policy website identifies five countries supposedly ‘on the verge of following Iceland to economic ruin and political meltdown’. Top of the list is the UK, and the piece mentions London’s new nickname of Reykjavik-on-Thames to highlight the parallels. For a more sceptical take on the Reykjavik-on-Thames meme, see this piece from the UK’s Sunday Times.