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The Weakened Global Economy

Danny Quah - 6th March 2015
The Weakened Global Economy

Danny Quah comments on pessimistic reports on the direction of the world’s economy.

The headline on The Economist leader (11 Oct 2014) made matters brutally clear: “Growth is healthy in America and Britain. But most of the world economy is in trouble”.

Many of the best-known, most influential observers might agree with The Economist’s statement to some measure.  Martin Wolf wrote in the Financial Times (14 Oct 2014) that “while the performance of high-income economies has been poor, especially in the eurozone, in the medium-term it is the emerging economies whose prospects appear bleakest.”

(To be clear, Wolf himself in his very next paragraph goes on to make a case that such emerging-economy pessimism needs to be moderated along the same lines as the first part of what I will say below.)

Everyone can, of course, put forward their own preferred forecasts.  But the IMF has an awesome team of dedicated economists, overseen by one of the most scrupulous, careful, and insightful of Chief Economists anywhere.  Does The Economist’s view come from the IMF’s recent World Economic Outlook, released at about the same time?

The Economist says it is more pessimistic than the IMF, the latter already warning that world growth has gone all secular stagnation. Fair enough. But the IMF, in its Oct 2014 World Economic Outlook, would disagree with The Economist in a quite different way, not just in overall optimism.

Why? Because when you look into the IMF’s Oct 2014 WEO statistics database and do a bit of calculation, here’s what you find:

(Series NGDPD – GDP at market exchange rates)

 

2013 (tn Intl$)

2019 (tn Intl$)

Increase (tn Intl$)

% Growth – Annual

Increase relative to US

Emerging market and developing economies

29.17

43.37

14.20

6.6%

2.64

Major advanced economies (G7)

34.53

43.81

9.28

4.0%

1.73

United States

16.77

22.15

5.38

4.6%

 

United Kingdom

2.52

3.70

1.18

6.4%

0.22

China

9.47

15.52

6.05

8.2%

1.12

(obviously the 2019 column is the IMF’s WEO already pessimistic forecast).

Rich-economy secular stagnation isn't slowing down growth in emerging nations. From: Quah, Danny. 2014. "Convergence Determines Governance"

(Rich-economy secular stagnation isn’t slowing down growth in emerging nations. From: Quah, Danny. 2014. “Convergence Determines Governance”)

For the key message – very much related to part of the points made by Martin Wolf – look at the last column. This is the ratio of the magnitude of increases in total GDP – at market exchange rates, not PPP, and not as proportional growth rates – of different groups and individual economies, relative to that of the US, over 2014-2019. The group of Emerging Markets and Developing Economies will, at market exchange rates, add to growth in the global economy 2.64 times what the US will. China alone is already expected to add 1.12 times the US’s contribution. The UK? 0.22 times.

Does the emerging world not count?  At market exchange rates they’re already as large as the G7.

Where exactly do so many observers get their conclusion about US and UK growth, and the health of the world economy?

Advanced and developing countries co-move ever more closely short term. From: Quah, Danny. 2014. "Convergence Determines Governance"

(Advanced and developing countries co-move ever more closely short term. From: Quah, Danny. 2014. “Convergence Determines Governance”)

The key point here (that I originally learnt from, most convincingly, Kemal Dervis, and that I’ve since re-calculated under differing assumptions) is that while over short-term cycles the emerging markets have become ever more correlated with the advanced economies, over the slightly longer-term they are all relatively de-coupled.  Compare the trends Figure 1 above with that for higher-frequency fluctuations in this (Figure 3). Perhaps it is this last empirical regularity (which, for technical reasons, would be that emphasised when we calculate year-on-year growth rates, whether in our minds’ eye or on paper) that makes so many observers despair for the emerging markets when the advanced economies slow down.

[Appendix:  Because we’re talking about the global economy overall and its growth performance and cyclicality, it is appropriate for individual economies or groups of them to be considering total GDP, not per capita GDP.  This last, per capita GDP, would give some idea of the well-being of people, especially if measured in Purchasing Power Parity. But it is total GDP at market exchange rates that measures the size of the footprint of different parts of the world in their observable co-movements and in their contributions to ups and downs in the global economy.  It is total GDP that matters for geopolitics. Regarding appropriate horizon in time, looking ahead to 2019 is not exactly a long-range forecast. Moreover, regardless of the forecast horizon, so long as we treat like with like, i.e., US and UK GDP projections symmetrically alongside those of the others, my point remains unchanged. Finally, there is almost surely a wide band of uncertainty surrounding these forecasts. However, significant downside risk does not render the estimates given for emerging markets here unduly optimistic. Any significant downside risk will already be incorporated in the IMF WEO estimates. (Put differently, given the estimates there can’t be additional significant downside risk without there also being additional significant upside risk.)]

 

This post first appeared on Danny's blog.