World Economic Outlook (WEO)

January 25, 2016

The IMF released an update of its World Economic Outlook last week, which again reduced projected GDP growth.  Officials now expect world real GDP to expand 3.4% this year, down from forecasts of 3.6% made last October and 3.8% predicted six months ago.  Brazil was the object of one of the Fund’s largest downgrades, with a steeper projected GDP contraction of 3.5% compared to a projected drop of 1.0% embodied in the October World Economic Outlook and projected positive 2016 growth of 0.7% in the July 2015 report and 1.0% in the report released in April 2015.  The magnitude of this assumed deterioration is unthinkable for a country hosting the summer Olympic Games.  Ordinarily, host countries get a huge boost from that event and then suffer subsequent problems as happened to Greece, where the 2004 summer games were held.  In other notable emerging economies, Russian GDP in the latest WEO is projected to fall 1.0% this year, revised from a drop of 0.6% assumed three months ago and positive growth of 1.0% projected in the July 2015 report.  Projected Chinese growth for this year has been sliced to 6.3% from 6.4% predicted three months ago.

Among advanced economies the downgrade in this month’s WEO Update is concentrated in the United States.  There real GDP is now expected to rise 2.6% in 2016 versus forecasts of 2.8% made last October, 3.0% made last July and 3.1% assumed nine months ago.  Eurozone growth was actually bumped up 0.1 of a percentage point (ppt) to 1.7%, while assumed 2016 growth in Japan of 1.0%, Britain of 2.2%, and Canada of 1.7% were unchanged from estimates in the October WEO.

Projected global real GDP for 2017 was also revised lower, dropping to 3.6% from 3.8%.  Advanced economies are expected to collectively expand 2.1%, the same speed as in 2016, and 4.7% growth is penciled in for emerging and developing economies, down from 4.9% in the October 2015 forecast.  Chinese growth is thought likely to slow to 6.0% and be exceeded by a 7.5% expansion of Indian real GDP.  Among advanced economies, projected U.S. growth was lowered 0.2 ppts to 2.6%, projected eurozone GDP was kept at 1.7%, predicted Canadian GDP expansion was sliced 0.3 ppts to 2.1%, and British GDP was bumped down to 2.2% from 2.3%.  In Japan where a consumption tax hike to 10% is scheduled to be made in April 2017, growth that year is now thought likely to be a measly 0.3%, down from assumed growth of 0.4% in the October 2015 report and 1.2% projected in the reports released in July 2015 and April 2015.

While still comparatively young, the 21st century has evolved sufficiently to draw some early conclusions.  At this stage in the 19th century, Napoleon’s havoc had ended recently, and the transformational industrial revolution lay mostly ahead.  A century later found Europe gripped by its costliest war ever and an international monetary system anchored around a gold standard developing large unworkable fault lines. Over the ensuing two decades, conditions would get a whole lot worse in both respects.  The 21st century dawned with enormous but alas unfulfilled promise.  The Cold War has been replaced by a more primitive tribal strand of geopolitical strain that’s harder to address and which in the process has been dividing western societies apart rather than bringing them together to solve challenges as happened at the darkest moments of the prior two centuries. 

Largely unnoticed in the 20th century was unprecedented exponential population growth, which underpins the current danger of catastrophic climate change with stakes even greater than seen in the prior two centuries.   Mankind emerged successfully from those challenges in part because of the ingenuity of inventors, whose creations and applications made the unthinkable possible and eventually routine.  The downgrades to projected global growth in the latest batch of IMF forecasts fit a pattern of reduced possibilities that has become all too familiar since the start of the 21st century.  While no single factor accounts for the new normal, high on the list is the quality of technological change, which has been unveiled with considerable fanfare but thus far has done little to goose labor productivity. The cutting edge of technological creation remains amazingly clever, suggesting that the problem is not so much of doing a bad job but rather of inventors and designers doing the wrong job.  One hopes that the infinite wisdom steering the invisible hand of market forces would guide economies to produce not only what people want but what they will need for survival.  The breakthroughs so far of the 21st century have rewarded inventors and appliers of new technologies mightily but not steered people properly into the directions that will be needed most during the remaining 86 years.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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