IMF unsurprises with lower growth forecast

The IMF lowered its forecast for global economic growth for 2018 and 2019, citing structural reasons such as increasing trade protections and a weaker outlook for emerging economies. The Wall Street Journal cites the IMF numbers as weighing on markets on Wednesday (see here).

Nobody should be surprised by downward revisions of the IMF forecasts, however. The IMF’s initial forecasts have been too optimistic each year since the Financial Crisis and have regularly been revised down. While structural economic reasons can plausibly explain the most recent revision, the revision is also consistent with a structural issue in the IMF’s model that leads to forecasts that are initially over-optimistic and require downward revisions afterwards.

To illustrate this point, I downloaded the IMF’s past forecasts for each year since the Financial Crisis, available here.

plot of chunk unnamed-chunk-15

To read this plot, follow any line (say the red one), and you’ll see the growth for that year (for the red line: 2012) as forecasted in different years. You will notice that the forecast history is such that the final forecast is lower than the initial forecast by a fair amount. In between, downward revisions typically happen gradually.

The point is that one desirable property of a forecast is that it is correct on average, i.e. the forecast is sometimes too high and sometimes too low and the forecast error is 0 on average. Here, though, the forecast revisions have mostly been negative, suggesting that there might be an issue with the forecasting model, making downward revisions over time necessary regardless of the structural economic reasons cited above.

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