Last week Alan Kohler, noting that the IMF had been overoptimistic in its growth forecasts for the developed world, asked if they were likely to get it right this time.
A good question, the obvious answer being “no!”
The IMF forecasts, though having proved over-optimistic in six of the past seven years have not been hopelessly incorrect. The global economy rarely moves in lurches, though when it does as in 2007, hardly any forecasting model picks it accurately. The table below looks at the IMF’s GDP forecasts (per cent change) a year ahead and the outcomes.
It is a reduction in investment in the developed world that marks out the period since 2006. Pre-recession, some 23 per cent of developed countries’ GDP comprised investment but this level has fallen to around 20 per cent since. A drop of this size is important because most investment only replaces existing assets. And it is also likely that more of the current investment has been allocated to sub-optimal venues like government infrastructure as well as the worthless renewables that have sucked in $18 billion in Australia alone. By the same token we are seeing the scrapping of investment in industries like aluminum smelting, with high labour productivity.
The relative lack of investment is underpins the causes for the sluggish economic growth in the developed world. Most economic models like most economists see the future in Keynesian terms with a splash of Friedman’s monetarism. In these models, growth starts with new spending by consumers stimulated by an increase in money supply or an increase in government spending. This, so the story goes, leads to increased demand and firms start gearing up investments which brings further increases in demand while at the same time facilitating increased production to supply the demand. If that ever worked it surely is not working now – productive capacity to supply the goods and services is inadequate.
And into this Brave New Cauldron we have the G20 which is said to want to adopt policies that will lift growth by two per cent. But budget deficits, though being reduced, show no sign of shifting to surpluses; government spending has fully absorbed the loss of GDP share from investment. And the people pulling the economic levers can engender little confidence:
- In the US, we have a leading Keynesian economist in charge of the Fed and a President who is totally ignorant about how economies grow.
- In the EU, ECB President has renewed his pledge to boost inflation by increasing demand through the money supply
- And in Japan, Abeconomics prevails – two suicide arrows (fiscal stimulus, monetary easing) and a third (structural reforms) which never leave the quiver.