Can You Believe the IMF Optimists?

Can You Believe the IMF Optimists?

Experts at the International Monetary Fund publish regular economic forecasts twice a year: in mid-spring and in mid-autumn. Using this past October’s economic survey and the predictions derived therefrom, along with comparisons between the predicted and actual data for previous periods, has allowed analysts from the World Organization of Creditors to suggest that IMF experts see the global economic situation in a brighter light than it actually is.

For starters, there is the comparison of the economic realities of 2012 with the picture painted by IMF experts three and four years ago.

However, the crisis took its toll. In 2008, global GDP grew by only 3.0% (and according to later corrected data, growth was less, at 2.8%). Instead of economic recovery in 2009, the world saw a decline of 1.1%. Economic growth in 2012 was 5.1% according to the latest figures, which turned out to be higher than expectations. Nevertheless, in all subsequent years, the global economy grew more slowly than IMF experts had expected in both 2008 and 2009. For the next five years up to 2017, we are once again seeing quite optimistic figures: Global GDP will grow 3.6-4.6% a year. But based on past experience, we can say with confidence that these forecasts are too optimistic and will be adjusted downward.

Earlier, IMF experts made forecasts for the majority of indicators, such as investments, just a year in advance. Currently, a number of forecasts are made for longer periods of time.

In 2008, it was expected that investments made in 2009 would total 23.6% of global GDP. But because of the crisis, forecasts in 2009 were lowered almost 2% to 21.9%. But even those figures turned out to be a bit high: In 2009, investments accounted for only 21.7% of global GDP. In 2010, however, the real numbers were higher than the forecasts; in 2011 and 2012, the figures reached 2008 levels. IMF experts are forecasting global increases in investments. That is, until a new crisis makes changes.

In 2008 there was a high rate of inflation (average consumer prices) of slightly more than 6%. Due to the downturn of the economy in 2009, the IMF forecasted a decline in inflation to 2.8-2.9%, but despite the difficult economic situation around the world, inflation remains relatively high. In 2011, for example, it was 4.9%, and in 2012 it was 4.0%. At the moment, inflation for 2013-2017 is expected to be 3.4-3.7%, meaning that forecasts have actually returned to to the level of 2008.

Let’s look at the commodity price indexes. We note that the base rate is set at 2005 prices; that is, the 2005 index is taken as 100%. The total commodity price indexes in 2008, according to final data, were equal to 172%. The global crisis at that time was so severe, that prices dropped to 121%; however, in 2011, that figure reached 192%.

A less severe decline, for which the reasons are clear, was observed in food and beverage prices. After a decline in 2009 to 136%, from 157% in 2008, the price index for food and beverages grew to 181% in 2011. Experts currently forecast a decline in the price index for 2013 to 172%.

According to estimates and projections made in 2008, the GDP of countries with developed economies in 2008 grew 1.5%, with very modest growth forecasts for 2009 of just 0.5%, and expected stabilization for 2010-2013 at 2.0-2.9%. In reality, though, developed countries’ economies grew only 0.06% in 2008, falling 3.5% in 2009, and bounding back by 3% in 2010. The table shows that the 2008 and 2009 forecasts for 2011-2013 were too high in comparison with the assessed economic situation at that moment, meaning that even during the recent economic crisis, experts could not predict that economic growth in developed countries for future periods would be much more modest.

Unemployment rate projections in developed countries were also too optimistic. In 2008, IMF experts forecasted that the figure would be 6.5% for 2009, while the actual figure was 8.0%. Unemployment in 2012 is expected to be on par with this; even by 2017, according to the projections, it won’t fall to the pre-crisis levels of 5.8%. Thus, the situation in these countries’ labor markets will remain tough for a long time.

In Central and Eastern European countries, there was a significant decrease in GDP in 2009: It fell 3.6%, according to the latest revised data. Nevertheless, this group of countries showed better results than forecasted in October 2009, and the economic recovery in 2010 was more significant: GDP grew 4.6% compared with the October 2009 expectation of 1.8% growth. That means that the 2008 forecasts for 2010 and 2011 were quite accurate. True, it is currently expected that economic growth will be fairly modest: 2.0% for 2012 and 2.6% for 2013.

A significant decline was also observed in investments. Whereas in 2008 the investment to GDP ratio was close to 25%, during the crisis that value dropped to 18.9%. Experts don’t expect any recovery to previous levels before the end of the forecast period (2017).

As a result of the crisis, direct investments declined several-fold in absolute terms. Whereas in 2008 it was forecasted that 2009 investments would reach $82 billion, in 2009 that figure was lowered to $32 billion, which is practically in line with what happened. In 2010, the figure fell to $21 billion. It will take a long time for the figures to return to previous, pre-crisis levels.

As seen in the table above, forecasts for GDP growth in this group of countries were overstated in 2008. Instead of the economy’s expected recovery of 5.7%, it fell 6.4%. Recovery turned out to be more sizeable than expected in 2009: In 2010, GDP grew 4.8%. Current growth projections are more modest, though, than in 2008 and 2009.

Direct investments in 2009 were only $16 billion, compared with $50.6 billion in 2008. Current forecasts for these figures are very conservative; for example, in 2013 the volume of direct investment is expected to be $10.4 billion.

Considering the amount of foreign debt, we can say that the situation in these countries is acceptable. Despite the fact that in 2009, as was the case worldwide, the countries’ debts increased (to 45% of GDP), they are now at tolerable levels. In addition, the IMF is projecting a decline in total external debt to 33% of GDP in 2013. That is, the debt-burdened countries will return to pre-crisis levels next year.

Even during the crisis, the developing countries of Asia maintained high rates of GDP growth. The economy grew 7.0% in 2009 and 9.5% in 2010. At present, forecasts for the rate of growth are lower than they were in 2008 and 2009; nevertheless, they are high compared with other country groups, at 7.2-7.7%. Despite the crisis, in 2009, Asian countries increased their investments to 41.4% of GDP and this, despite the fact that even in 2008, a lower figure of 39.7% was predicted. Experts expect that the figure will be high, around 41-42%, by the end of the forecast period.

As the table shows, the recent crisis didn’t even affect the relative size of the total external debt of the developing Asian countries. Between 2008 and 2011, that number never exceeded 16% of GDP. Only for 2012-2013 might the countries’ debt to GDP ratio exceed16%.

Thus, the 2008 forecasts show that IMF experts did not foresee the global economic crisis at that time. All expectations were positive and there was no decline projected. In 2009, the crisis immediately took its toll, and experts started forecasting a tougher global economic situation; but in reality, the situation was already worse, for example, in countries with developed economies. In the Central and Eastern European countries, the situation was better in 2009-2010 than was forecasted in 2009; however, current projections for 2012-20__ are more modest than even the projections issued in 2009. This could mean than countries in this region are still struggling with the fallout of the crisis and are affected by the debt problems in Western Europe, etc. A similar situation can be seen in the CIS countries, Georgia, and Mongolia.

The developing Asian countries were the only ones for which the crisis was relatively painless, compared with other countries. They didn’t experience a decline in GDP, just slower growth. Investments remained high and the external debt to GDP ratio remained low. And forecasts look positive.

If we consider the inflation forecasts for individual countries, there are no general trends. In 2008, for example, forecasts for 2009 for Germany, Kazakhstan, China, the U.S.A., and France were higher than the final values recalculated for the IMF 2012 report. Expectations for Russia were practically identical, while for India, on the contrary, consumer prices rose considerably more than expected. In 2012, the forecast for all countries except India were generally lower than those for that period in 2008 and 2009.

So can the IMF forecasts be trusted? Even after thorough preparation of annual reports, the answer to this question is not so clear-cut. Economic development depends on various factors and it is impossible to take all of them have into account in the forecast, no matter how carefully the evaluation is done. But in our opinion, IMF expectations are still often guilty of over-optimism. Fund experts also have more confidence in countries with developed economies than in developing and transitional ones, which is far from fair, especially these days.

Text: Oksana Chaika and Nadiya Aliullova