19/10/18: IMF's Woeful Record in Forecasting: Denying Secular Stagnation Hypothesis

A recent MarketWatch post by Ashoka Mody, @AshokaMody, detailing the absurdities of the IMF growth forecasts is a great read (see https://www.marketwatch.com/story/the-imf-is-still-too-optimistic-about-global-growth-and-thats-bad-news-for-investors-2018-10-15?mod=mw_share_twitter).  Mody's explanation for the IMF forecasters' failures is also spot on, linking these errors to the Fund's staunch desire not to see the declining productivity growth rates (aka, supply side secular stagnation).

So, to add to Mody's analysis, here are two charts showing the IMF's persistent forecasting errors over the last four years (first chart), set against the trend and the cumulative over-estimate of global economic activity by the Fund since mid-2008 (second chart):

While the first chart simply plots IMF forecasting errors, the second chart paints the picture fully consistent with Mody's analysis: the IMF forecasts have missed global economic activity by a whooping cumulative USD10 trillion or full 1/8th of the size of the global economy, between 2008 and 2018. These errors did not occur because of the Global Financial Crisis and the high degree of uncertainty associated with it. Firstly, the forecasting errors relating to the GFC have occurred during the period when the crisis extent was becoming more visible. Secondly, post GFC, the hit rates of IMF forecasts have deteriorated even more than during the GFC. As Mody correctly points out, Fund's forecasts got progressively more and more detached from reality.

At this stage, looking at April and October 2018 forecasts from the Fund's WEO updates implies virtually zero credibility in the core IMF's thesis of a 'soft landing' for the global economy over 2019-2021 time horizon.

22/6/18: 'Skeptical' IMF tends to be over-optimistic in its U.S. growth forecasts

In recent weeks, the IMF came under some criticism for posting relatively gloomy forecasts for the U.S. economy, especially considering the White House rosy outlook that stands out in comparison. see for example, WSJ on the subject here: https://www.wsj.com/articles/imf-sees-u-s-potential-growth-at-half-the-pace-of-white-house-estimates-1528995732.

Which begs two questions:

1. Does IMF have any grounds to stand on its forecasts divergence from the White House? and
2. Are IMF forecasts for the U.S. economy actually any good?

Firstly, the grounds:

Per above chart, the IMF is not alone in being less than exuberant about forward growth forecasts for the U.S. In fact, it is White House that appears to be an outlier when it comes to 2020-2023 outlook.

Secondly, per the question above, I crunched through IMF's semi-annual forecasts releases from April 2013 on (period prior to 2013 is too volatile in terms of overall fundamentals to take any forecast errors seriously). The chart below summarizes these against the actual outrun:

On the surface, it appears that IMF forecasts in recent years carried massive errors compared to outrun. So I did a little more digging around. I took 1, 2, 3, and 4 years-ahead forecasts, averaged them over different forecast releases, and estimated 90 and 95 percent confidence intervals for these. Here is the resulting chart:

What does the data tell us? It says that IMF forecasts have, on average, overstated actual growth outrun. In other words, IMF forecasts have been over-optimistic, not excessively pessimistic, in the recent past. More that that, IMF's current (April 2018 WEO release) forecast for the U.S. GDP growth is even more optimistic than already historically optimistic tendencies of the Fund imply. In other words, even though the first chart above shows the IMF forecast for the U.S. growth to be pessimistic, compared to that of the White House, in reality, IMF's forecasts tend to be wildly optimistic.

Average error for 1 year ahead forecast for the U.S. in IMF releases has been 0.037 percentage points (very small), rising to 0.476 percentage points for 2 years ahead forecasts (more material error), and 0.867 percent for 3 years ahead forecasts. Augmenting data (to achieve larger number of observations to 2000-2006, 2011-2014 periods, 4 years ahead average forecasts has been 0.867 percentage points above the outrun growth. And so on.

So, to summarize:

1. IMF is not unique in being less optimistic on the U.S. economy than the White House;
2. IMF's history of forecast errors suggests that the Fund tends to be overly optimistic in its forecasts and that current official Fund forecasts are more likely to be reflective of significant over-estimation of future growth than under-estimation;
3. IMF's forecasts more than 1 year out should be treated with some serious caution - something that applies to all forecasters.

10/10/15: IMF: Un-Clued on U.S. Monetary Policy Normalisation

For all the positivity chatter about the return of the U.S. growth and 'normalisation' of the interest rates environment pushed into the world of unsuspecting journos by the IMF in its latest WEO Regional Outlook: Western Hemisphere, there is a nagging suspicion that something is strangely amiss.

Take the pesky problem of the U.S. monetary policy being exceptionally loose (or accommodative) since 2008. Chart below shows this by plotting a rate gap between policy rate and the 'neutral rate' with negative values indicating accommodation. Note, neutral rate is defined as the rate consistent with the economy achieving full employment and price stability over the medium term. Note also that adding in QE (over and above simple policy rate) pushes the metric of accommodation well beyond all historical comparatives in size (depth) and duration (length of time accommodation is present):

Now, naturally, one would expect these 'accommodative policies' to create a vast sea of surplus (relative to 'natural rate' consistent) liquidity (aka: money) in the U.S. system. And, naturally, one would expect that any 'normalisation' in the monetary policy would entail removing this surplus over time. Which, again, naturally, should translate into higher rates.

IMF obliges, providing us with this handy chart tracing forward expectations for U.S. policy rate:

The lift-off suggested in the chart above is rather steep and is steeper than the lift-off suggested by market pricing of futures (red line). In a sum, the chart above says: We have no idea what 'normalisation' will look like, but let's hope it will be more benign than the Fed signals and Primary Dealers Survey have been.

But here is a pesky little thing: You won't spot the same dynamics in IMF WEO forecast for either inflation or Libor rates. And the reason is pretty obvious: the more aggressive the Fed path in the chart above, the lower are growth projections in the chart below:

IMF forecasts from 2016 out to 2020 fall squarely in line with 2010-2015 averages for GDP growth (aka inflationary pressures) but are in excess of the 2010-2015 average for inflation itself.

In simple terms, despite all the talk about 'normalisation' of rates, the IMF is really saying that through 2020, we can expect the monetary environment (and with it the interest rates outlook) to be more benign than over pre-crisis average. Worse, inflation is expected to accelerate even though growth is expected to slip.

How does any of this square well with the idea of the Fed rate going to 3.75% as projected in the second chart above? Does any of this square well with projected 2016 interest rates for the Fed going to 1.2-1.3% against Libor under 1.2%? Does any of this square well with forecast inflation jump from 0.906% in 2015 to 1.404% and inflation outlook heading toward 2.322% by 2020?

In short, IMF expectations on both Libor and the Fed rate can be very tight.  Especially over the 2016-2018 horizon. If the Fed does stick to its signalled path (chart 2 above), growth will suffer relative to IMF projections (last chart above), despite already heading toward 2010-2015 average by 2019.

In the mean time, none of the IMF forecasts are consistent with Fed policies addressing in any reasonable way the built up of monetary policy excesses of the past.

Welcome to the world of forecasting after ZIRP. Shall we call it Fudge?..

10/10/15: IMF: "Honey, we've Japanified the World"

Much has been written this week about IMF’s World Economic Outlook and the belated catching up the IMF are performing to the reality of

1. Faltering Emerging Markets, but improving Advanced Economies
2. Flattening Global growth, but momentum recovery in the Euro area (that depends on the World demand for its exports); and
3. Largely still-ignored, but nonetheless hanging like a dark shadow over the IMF's forecasts, secular stagnation.

Now, with some time lapsed over all that media circus, let’s take a look at hard numbers.

Here is the breakdown of IMF changing forecasts.

First up, World real GDP growth forecasts. How did these evolve over the recent years?

Yep, that’s right. Back in October 2012, IMF was projecting 2015 growth to come in at 4.418%. This gradually fell back to 3.847% forecast in October 2014. This week outlook for 2015 full year global economic growth is 3.123%. All along, the IMF has been signing praise to structural reforms, ownership of various programmes (IMF-run programmes) and monetary policies efforts. Year after year, after year cheerleading the world to ‘next year things will be great’. Do observe how every forecast starts with the premise that "next year, there will be an uptick in growth". And the end game is 1.295 percentage points lower growth outrun for 2015 in October this year than back in  October 2012.

Guess what, every year from 2015 on, current forecast shows lower growth than that expected in the earliest WEO report containing such a forecast.

Ditto for the Advanced Economies, as shown in the chart below

Things are no better for the Euro area, despite the already low aspirations that the IMF had for the common currency area from the start:

And for the Emerging Markets - ditto.

You wonder how on earth can these 'rosy forecasts --> ugly reality' picture can be consistent with IMF ever-expanding 'sustainable' lending to the states in trouble? It doesn't, of course, for IMF growth projections simply do not support the lending the Fund is doing. Instead, it is the efforts of the Central Banks at printing money to monetise debt that make this pile of Government-backed junk 'sustainable' for now.

Now, 2010-2011 were pretty awful years overall for the global economy. Still, it managed to squeak out 4.828% average rate of growth in these gloomy days. Now, we have a global recovery, and volumes of structural reforms written, re-written and re—re-written. IMF is now virtually running half the planet and majority of Government are obligingly ‘owning’ their programmes. Beyond, we have tens of trillions of printed/minted/QEd/instrumented/engineered debt and cash instruments flooding the markets.

And yet:

• In 2015-2020, per IMF latest projections, Global economic growth is going to be lower than 2010-2011 average in every year.
• The same is true for the Advanced economies;
• The same is true for the Euro area; 
• The same is true for the Emerging Markets.

Actually, the rot has been ongoing since 2012. Here is the cumulative growth that has been achieved (through 2014) and is forecast to be achieved (from 2015 through 2020) since 2010 across the main regions:

You can’t make this up: even with the Euro area contained within it, Advanced Economies group outperforms Euro area group by almost 3/4rs.

The chart below slices the same data slightly differently, by looking at cumulative growth the IMF projected for 2015-2017 period.

Abysmal? You bet.

Based on 2010-2011 average, we should see Global economy expanding by 15.2% over the three years of 2015-2017. Instead, IMF projects growth of 10.86%. Advanced economies should grow by 7.4% based on 2010-2011 averages, but current forecast implies growth of 6.58%. Euro area economy should grow by 5.6% based on 2010-2011 averages, but current outlook implies growth of 4.87%. Emerging Markets should be growing by 22.1% under 2010-2011 average rates, and are now projected to expand by 14%.

Amidst all this, talking about Governments around the world ‘owning’ more reforms, as the IMF continues to do might be as close to Einstein’s famous dictum about insanity as one can get.

In the entire IMF review of the Western Hemisphere (that includes NAFTA states), there is only one, cursory mentioning of the phrase “secular stagnation” even though the entire WEO database published by the Fund screams it from every data set imaginable. But there are plenty of mentions in the WEO and the Fiscal Monitor and the GFSR for the need for the Euro area to harmonise more. Presumably because all this harmonisation before has not led us to where we are today - running an economy that is growing by margins statistically pretty darn indistinguishable from zero. There are admonitions by the IMF for the Emerging Markets to get onto the bandwagon of structural reforms too. Because the IMF prescriptions have worked so well in Europe, the dynamism of the continent is now overwhelmingly... err... what's the word here?... suffocating?..

Truth is, folks, we are now all Japanified. Time for the IMF to catch up with that trend and think up real reforms, such as

• Dealing with debt overhangs not by bleeding households and companies dry, but by restructuring these, 
• Dealing with slacked investment and enterprise creation not by shoving more cheap funds into the banks, but by using monetary firepower (the little that is still left floating around) to free households from debt and giving them lower taxation burdens, while providing proper risk and tax treatment of debt,
• Dealing with excessive policies harmonisation and coordination by encouraging the states to take the route to greater financial, fiscal and economic management independence, and
• Promoting not the divisive, Us-vs-Them types of quasi-regional trade deals recently welcomed by the IMF under the US-led TPP and TTIP, but inclusive trade negotiations under the WTO umbrella.

Because, as Japan's example has taught us so far, Japanification can't be cured by printing presses and fiscal stimuli. And it is sure as hell can't be cured by the IMF 'structural reforms'...

7/7/2014: About those Global Growth Uplift Forecasts...

Last week, IMF updated its World Economic Outlook with a fresh upgrade to global growth forecast for 2015. Lot's of media miles have been travelled over this upgrade (here's one example). And, in fairness, the IMF might be right: there has been some firming up in global growth in recent months.

More significantly, the firming up is coming on foot of stronger performance of the advanced economies, where the cycle is now clearly indicating early stages recovery.

The same positive momentum has been confirmed in a number of expert surveys, e.g. BlackRock Investment Institute and McKinsey Global Institute and so on.

Still, just to be on the safer side, it is worth taking IMF forecasts in perspective. The Fund has been systematically wrong in its outlooks for Global and Advanced economies growth in recent years. Here is some evidence.

First: take the same period estimates (April-published estimates for the same year growth). These should be pretty easy to predict, as by the date of their release, the Fund has contemporaneous data flows on the economies (e.g. PMIs) and previous year dynamics pretty much sorted. Table below shows that, despite some data already being available, the Fund has rather varied experience with its estimates. And when it comes to the World Economy estimates, things have goo ten worse over the last three years, compared to the 5 years range.

Second, let's look at one year-ahead forecasts. Here, things are better in most recent three years, but they are not brilliant, especially when it comes to the Fund forecasts for the Euro Area. 3-5 year average over-estimate of growth is to the tune of 0.76-1.05% per annum. When it comes to World growth forecasts, these too turn out to be too optimistic, in the range of 0.56-0.60% annually.

Third: over two years forecasts, Fund's performance is worse: for the World economy forecasts tend to be on average more optimistic than the outrun by between 0.68% and 1.04% per annum. The same range for Euro Area is 1.19% to 1.53%.

Two charts illustrate the above. First: One-year ahead forecasts compared to outrun:

Next: 2008-2012 forecasts and 2013 (April) estimate for growth in 2013 compared to actual outrun:

Someone criticised my choice of the period covered, but the entire point of my argument here is not that the IMF is bad at forecasting (it is no worse than many other sources), but that forecasts at the times we live in are by their nature highly restrictive. That is, of course, not the notion one gets from reading business media reports of every IMF (or other major source) forecasts update.

So the net conclusion must be that there are indicators of global growth firming up… but I would't be rushing to buy on foot of IMF statements about 2015… At least not until there is a clear and established trend along which the forecasters can glide smoothly. When we need forecasts most, they are least useful… such is reality.