Economists are full of it and the IMF doesn’t have a clue
YOU’D expect the World Bank to employ some pretty top-notch economists. The body and its 10,000 staff - including a fair smattering of economists - are charged with spending tens of billions of dollars donated by member countries to lift the developing world out of poverty.
And to do that effectively, I suspect, you would need to have a pretty good grasp on what the world economy is actually doing.
In reality, however, the bank doesn’t seem to have a clue. Earlier this week the World Bank ``revised’’ its forecast for global GDP this year from a fall of 1.7 per cent to a fall of 2.9 per cent. With global economy worth roughly $85 trillion, that’s a $1 trillion ``revision’‘. It’s the equivalent of forgetting to include Australia - the world’s 14th biggest economy.
In the World Bank’s defence, the financial world is moving pretty quickly at the moment and, sadly, it is not alone in being completely incapable of picking where things are heading.
``We have revised our forecasts ...’’ is economists’ favourite phrase.
The hairier economic conditions get, the most frequently it appears. Economists are completely shameless about it. They see nothing wrong with constantly changing their projections. Which begs the question: what exactly is the point of making a forecast?
Take the International Monetary Fund - another big international body with batteries of economists on its payroll.
In July last year - that’s less than a year ago - it predicted the world economy would grow 3.9 per cent this calendar year. In October, after the Wall Street meltdown brought the global financial system to its knees, it prudently revised that to 3 per cent. It had another stab a month later, saying things were looking a little murky and 2.2 per cent grwoth was more likely.
In January, things were really looking grim, so it plumped for skinny 0.5 per cent growth. Then in April, four months into the year, it bit the bullet and agreed the world was going into recession and the global economy would shrink by 1.3 per cent.
The IMF’s next forecast is due out on July 7, and it’s likely to be pretty close to the World Bank’s negative 2.9 per cent figure. That’s five ``revisions’’ in a year for a total of 6.8 percentage points, or $6 trillion.
Economists, like everyone else, have a right to change their views as new facts are presented (and it pours financial data every day). It’s just that they change their minds so often - and so long into, or after, the event. At the track, betting stops when the horses jump. Economists get to keep better during the race, and even after it’s been run.
Earlier this month, plenty of economists changed their forecast of Australia’s March quarter GDP the day before the figures were handed down. They’d all been predicting a fall - sending Australia in technical recession - until a rosy set of retail numbers convinced more than a few GDP would rise. It did, and they basked in their brilliance.
But remember, this was actually a ``forecast’’ of an event that had already happened - the March quarter. And that’s like the weather bureau coming out today and revising the forecast it made for last Tuesday.
Most of the world’s economists should be ashamed that they didn’t see the global financial crisis coming. The fact that we can list the ones that did - Nouriel Roubini, Nassim Nicholas Taleb, fellow Puncher Steve Keen among others - says a lot.
I accept that the legion of highly paid financial media commentators was equally useless in seeing the storm approaching. (I also accept that in this forum last week I was banging on about the media’s unhelpful obsession with meaningless, trillion-dollar figures. What can I say? I have revised my opinion.)
The point is that it’s extremely difficult to take economic predictions seriously - particularly as we search for signs out of the financial gloom. How are we now expected to believe the World Bank, the IMF and the OECD as they start lifting forecasts for coming years - as they’ve been doing this week?
In March, the OECD said the economies of its members (the 30 richest countries in the world) would shrink 0.1 per cent next year. This week, the OECD ``revised’’ that to growth of 0.7 per cent.
The IMF said yesterday the Australian economy would grow 1.5 per cent next year, after just two months ago predicting a more anaemic 0.6 per cent gain.
Wayne Swan leapt on the ``revised’’ figures. ``The IMF,’’ he said, ``has delivered another clear endorsement of the Rudd government’s actions to combat the global recession.’‘
This is the same Treasurer who in May last year reckoned the Australian economy would grow 2.75 per cent in 2008-09. In May this year, he ``revised’’ that to zero - then forecast we’d be roaring of recession by next year. I won’t hold my breath.
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