Transcript convergences and divergences - UNCTAD Paragraph 166 Course

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
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de-coupling
In part due to move from convergence of policy coordination to divergence
This reinforced pre-existing trends (in particular, southsouth)
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 and a
recovery subject to downside risks
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World
Developed
Countries
South East
Europe & CIS
Developing
Countries
of which: China
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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.
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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).
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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.
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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’.
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Risks:
Stalling progress in Euro area,
Possibility of slowing investment in China,
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But likelihood of risks and potential impact has diminished.
Possibility of stronger-than anticipated recovery has increased.
Debt and fiscal issues in US
Disruption of global oil supplies.
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UN-DESA WESP (2013) Slowdown in baseline with
significant downside risks, but hopes for benign
rebalancing with coordinated policies
Substantial potential impact of
downside risks…. WESP (2013) …(2)
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Global slowdown has been synchronised
WESP (s)
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Developing Economies
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Economies in Transition
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Developed Economies
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2012
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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)
UN Desa and the Link Project – example
of forecasting process
• Joint meeting of the Second Committee and the Economic Social
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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)
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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.
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China: Ensure sustained rapid growth, by continued progress on marketoriented 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.
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How to get the world economy back
on track? WESP 2013
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Present policy stances insufficient and source of uncertainty
Fundamental policy shift is required:
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Coordination of fiscal policy  new growth impulses
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Redesign fiscal and structural policies  job creation & green growth
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Monetary policy coordination
 less capital volatility
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Accelerate financial regulatory reform
fragility
 reduce financial
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Ensure adequate development finance
and achieving MDGs
 benign rebalancing
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.