Why IMF’s Doomsday Coronavirus Prediction Is Bullish for the Economy
The International Monetary Fund has issued a grim warning on the global economy. Here's why that's not necessarily a bad thing -- and why you should be skeptical of anything the Fund publishes. | Image: REUTERS/Brendan McDermid
- The IMF is forecasting 3% contraction in global GDP this year due to coronavirus.
- A quick recovery in 2021 is eyed, but that depends on appropriate policy support and the resumption of normal economic activity. The latter seems highly unlikely amid widespread lockdowns.
- History teaches us to be extremely weary of the Fund’s forecasts as they are rarely accurate in predicting global economic trends.
The International Monetary Fund (IMF) on Tuesday issued a grim forecast for the global economy, warning of a Depression-style collapse in 2020 amid coronavirus.
While the IMF isn’t the first organization to warn of a pandemic-fueled recession, its track record of predicting global economic trends is embarrassing.
IMF Predicts Depression-Era Collapse
The Washington-based Fund expects the global economy to shrink 3% in 2020 , dwarfing the 0.1% contraction seen during the depth of the financial crisis in 2009.
Nations and regions hit hardest by COVID-19 include the United States, Eurozone, Japan and Canada. Emerging markets are also expected to contract sharply, with China set to lose 4.8%.
IMF forecasters see a big rebound in 2021 — to the tune of 5.8% — but warned that their outlook depends on the trajectory of COVID-19.
“There is extreme uncertainty around the global growth forecast,” the IMF warned in its report.
Much of that uncertainty is tied to the the efficacy of containment efforts, the extent of supply-chain disruptions, financial-market instability and prolonged shifts in consumer spending patterns.
IMF’s Dismal Track Record
The Fund’s April forecast represents a 6.3 percentage-point revision from January when the extent of the coronavirus pandemic wasn’t known. While one can hardly blame the IMF for adjusting its numbers in light of COVID-19, the organization has a terrible track record of anticipating global macro trends.
It’s even worse at calling recessions.
Using October as a baseline, the Financial Times in 2018 found that the IMF predicts an average of five economies contracting the following year . In reality, an average 26 economies have contracted over the same period. (That’s still better than the Federal Reserve, which has never forecast recession.)
It gets worse. A Bloomberg analysis of more than 3,200 same-year country forecasts found that the IMF was within a 0.1 percentage-point margin of error only 6.1% of the time. In the remainder of cases, the Fund underestimated GDP growth 56% of the time and overestimated it 44% of the time.
While Bloomberg’s analysis conceded that the IMF’s forecast accuracy has improved since the financial crisis, its biannual forecasts are routinely downgraded — a trend that predates the coronavirus outbreak.
It goes without saying that economic forecasts should be taken with a grain of salt. While this isn’t limited to the IMF, the Fund’s reports have become essential reading for decision-makers in public and private circles. It’s high time that begins to change.
If history is any indication, the Fund’s forecast is probably off the mark — and possibly overstating the downturn at hand.
If the IMF guesses correctly, it would be a truly stunning feat as the global economy has booked just four recessions since 1960 . Since the current recession would be due almost entirely to coronavirus, the bounce back could be far greater than the Fund is predicting. But then again, what do I know? My point is that the Fund doesn’t know either.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
