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Global income and trade trends and forecasts – convergences and

divergences.

Short courses for Permanent Missions in Geneva.Thursday 7 March 2013.

By Diana Barrowclough, Senior Economist Division on Globalization and Development Strategies, UNCTAD.

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Main themes:

• Global economic trends – divergent growth path leading to de-coupling

• In part due to move from convergence of policy co-ordination to divergence

• This reinforced pre-existing trends (in particular, south-south)

• Look through the lens of economic forecasts:• What was expected, what is expected now?• Divergence of expectations in past, less so now.• Can these be reconciled?• What lessons did we learn• Set the scene for the practical trade-related sessions

to follow.

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Global economy: shaken by a crisis Global economy: shaken by a crisis and a recovery subject to downside and a recovery subject to downside

risksrisks

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-2

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World DevelopedCountries

South EastEurope & CIS

DevelopingCountries

of which: China

2007 2008 2009 2010 2011 2012

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Prospects for the world economy:

• To what extent was this expected?• WB Global Economic Prospects• World Economic Outlook and Update (IMF)• World Economic Situation and Prospects

(UN-DESA) • OECD, Private sector forecasters….Complex models forecast GDP growth rates,

inflation, interest rates, CA balances, employment, trade,

Analysis of medium-term threats to stability

Policies proposed to mitigate threats

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Prospects for the world economy …(2)

• Broadly, IMF forecasts were systematically more optimistic about advanced economies recovery prospects, and world recovery, than WB or UN-DESA

• Less divergence on forecasts for developing economies.• Now, much more similar in forecasts and risk concerns.

• IMF WEO (2012) and Update (2013)• Global growth 2013 up to 3.5%, cf 2012 (3.2%), but less than forecast (in WEO

2012).• Emerging and developing countries up to 5.5%,• Euro area contracts by 0.2% in 2013 instead of forecast expansion of 0.2 %

(because of delays in transmission of lower sovereign spreads and private sector credit availability)

• USA growth rises above trend to 2% (assuming US spending sequester is replaced by back-loaded measures and pace of fiscal withdrawal in 2013 remains unchanged.)

• Other assumptions behind global growth forecast:• Recovery takes “firm hold” in euro area• Weakness in advanced economies weighs on emerging market and developing

economies.• Lower commodity prices.

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Prospects for world economy …(3).

• WB Global Economic Prospects (Jan 2013).• Global growth no change at 2.4% in 2013 (ppp), 3.1% in 2004 and 3.3% in

2015.• Developing country growth to rise to 5.5% in 2013, 5.8% in 2015.• Asian region growth – follows external demand and policies in China. Slows on

back of weak external demand, and China policies to contain inflation. Excluding China, growth slows less quickly, on back of robust domestic demand.

• High-income countries growth downgraded to 1.3% for 2013, up to 2% in 2014.

• Euro area contracts by 0.1% in 2013 , edges up to 0.9% in 2014 • Assumes: progress on current Acc and fiscal deficits, unemployment, ‘lack of

competiveness’ and ‘structural constraints’.

• Risks:• Stalling progress in Euro area, Debt and fiscal issues in US• Possibility of slowing investment in China, Disruption of global oil supplies.

• But likelihood of risks and potential impact has diminished.• Possibility of stronger-than anticipated recovery has increased.

UN-DESA WESP (2013) Slowdown in baseline with significant downside risks, but hopes for benign rebalancing with coordinated policies

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Substantial potential impact of downside risks…. WESP (2013) …(2)

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Global slowdown has been synchronised WESP (s)

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Developed Economies

Developing Economies

Economies in Transition

Some reasons models can vary

• Basic models quite similar: behavioural assumptions….

• The formulation of the model – lags, logs, • Measuring differences – defining

aggregates, weighting aggregates (PPP or exchange rate basis), inclusion or exclusion of small countries, timing of data collection (quarterly, annual, nano-second), date of publication, « events »,

• Assumptions about the variables – what is the multiplier….

Modelling and the multiplier story….

• Debate about the size of fiscal multipliers, as many countries are in fiscal consolidation mode, and disappointed about the results.

• Have forecasters underestimated fiscal multipliers? Did the models under-estimate the short-term effects of government spending cuts or tax hikes?

• IMF World Economic Outlook Oct 2012.

• Blanchard and Leigh (2013), IMF Working paper.

The greater forecast fiscal cutbacks, the greater the growth disappointments…

• Blanchard and Leigh (2013), IMF WP.• Study 26 Euro countries.• Find that 1% rise in consolidation forecast is

associated with 1% real GDP loss relative to forecast.

• Robust – applied to all advanced economies; level of HH debt did not make a difference.

• Underestimates worst at start of the crisis (2009-2010, 2010-2011), less in later phase.

Searching for explanations…(B&L 2013 cont’d)

• Similar forecast errors also for EC, OECD, and EIU. Why?

• Few historical examples of zero-interest bound to compare. Under these conditions others’ estimates for multipliers range from 1.6 to 3.

• Consumption may depend more on current than future income than expected; investment more on future than current profits.

• Multipliers are greater during recession (2.5) than in normal times (fluctuate around 0).

Asks what does this mean for actual multipliers….

• “Can only guess” the assumed and actual multipliers, as not typically included explicitly in models.

• Tend use models in which multipliers depend on many elements.

• Results vary for aggregate or groups of countries, individual countries may have (+) or (-) multipliers than average.

• Multipliers should not have mechanical implication for fiscal policy in practice.

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And again … the fallacy that fiscal austerity sparks growth (TDR11)

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UN Desa and the Link Project – example of forecasting process

• Joint meeting of the Second Committee and the Economic Social Council

• World Economic Outlook• LINK global outlook• Policy-makers, delegates, country experts, academics• LINK national centres, UNCTAD, WTO, UNWTO,

• Process for WESP begins in July, launch in January.

• Among many discussions, one on Multipliers, especially in context of multi-country economic downturn, spillovers etc….impact on growth.

• National Institute of Social and Economic Research • Scenario1 (baseline), Scenario 2 (heightened stress, liquidity

constraint, impaired interest rate channel).• Forecast multipliers similar to those discussed in B&L, 2013.

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IMF WEO Update 2013…. (Policies)

• Policy action needed to secure fragile global recovery

• Advanced economies: • Steady and sustained fiscal consolidation.• US to avoid excessive fiscal consolidation in short-term, promptly

raise the debt ceiling, agree a credible medium-term fiscal consolidation plan focused on entitlement and tax reform.

• Financial sector reform to decrease risks in financial system.

• China: Ensure sustained rapid growth, by continued progress on market-oriented structural reform, re-balance the economy more towards private consumption.

• Other emerging and developing countries:• “The general challenge is to rebuild macroeconomic policy space”• * Balance downside risks against risks of rising domestic imbalances.• * Economies with large external surplus and low public debt – lower

pace of credit growth, fiscal measures to support domestic demand.• * In others, roll back fiscal deficits, and gradual tightening MP.• Macroprudental measures to help stem financial excesses.

How to get the world economy back on track? WESP 2013

• Present policy stances insufficient and source of uncertainty

Fundamental policy shift is required:

• Coordination of fiscal policy new growth impulses

• Redesign fiscal and structural policies job creation & green growth

• Monetary policy coordination less capital volatility

• Accelerate financial regulatory reform reduce financial fragility

• Ensure adequate development finance benign rebalancing and achieving MDGs

Some Implications for global and local trade….

• Continued slow growth in the advanced economies• Consolidation of stronger growth in developing

countries• Developing countries advised by all international

agencies (as well as domestic advisors) to focus more on domestic and regional demand, in addition to traditional markets

• Next sessions.