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2018-10-19Macro `n Cheese

Economic Outlook: Measuring the Risk Factors

Ten years after the global financial crisis, Roger uses the application to measure where we stand now, using the IMF’s Word Economic Outlook risk factors.

The Global Economy Today

In the last iteration of the IMF’s World Economic Outlook (WEO) there was a number of interesting takes on the world economy. In particular, there is a discussion of risks to the world economy. Today, I thought we could present a few graphs on the topic of risks to the economic outlook. Let’s start by taking a look at where the global economy is today, ten years after the global financial crisis (method and sample from IMF).

 

As can be seen, most of the world’s economies still post a gap of some 5% to pre-crisis trends and only a small number are posting incomes above pre-crisis trends. Admittedly, this might have something to do with the fact that some countries experienced a severe banking crisis, which is known to precede deep, drawn-out recessions.

 

Low Growth

However, even when adjusting for the 24 countries who experienced a banking crisis, we still see that post-crisis incomes are some distance below pre-crisis trends.

 

Apart from the impression that almost all countries, banking crisis or no, have suffered a deceleration in GDP-growth post-crisis, what also comes across from the above charts is that less than 15% of the countries are demonstrating higher income than what pre-crisis trends suggest. Applying normal confidence intervals suggests we can, statistically speaking, conclude that the GFC was a global negative shock to trend growth. If nothing else, this underlines the difficulties central banks and others are having in pinning down trend growth and related aggregates for policy analysis. This is akin to what the great, cuddly philosopher (aka A. A. Milne) once experienced: “I’m not lost for I know where I am. But, however, where I am may be lost”.

 

Rising Debt

To be sure, major economic crises leave long-lasting scars, which is nothing new, per se. Except, of course, for the low income (growth), which makes the high and rising in indebtedness all the more worrying. Debts are nominally fixed, while incomes are not. And credit/indebtedness is indeed among the four main causes of major GDP declines that the IMF identifies in their latest WEO.

 

Strife & Commodity Shocks

Besides crises (banking, credit, external/BoP etc.) the IMF also include ‘strife’. And while this is hard to measure in a coherent way, I notice that many commentators refer to either the Boston College GPR or the Economist EPU indices for guidance.

 

Even though they are intertwined with the political risks, the IMF also gives commodity shocks a spot on the select list of causes to major GDP-declines. From my perspective it is hard to see that being much of an issue, at least not right now.

 

Transitions in Economic Policy

The final factor, transitions in economic policy, deserves more attention. This is by far the most common trigger to major economic downturns, and one that also interacts closely with the other factors mentioned above. Now, the IMF rightly suggests changes to regimes of stabilization policy, but they also give a nod to misguided economic policy and of course, in hindsight, this is exactly what “unconventional monetary policy” could prove to be. I have mentioned this before: Why are all eyes on the modest interest rate hikes? – when ‘quantitative tightening’ could very well prove to be most interesting!

 

 

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Disclaimer

We don’t usually have views and opinions about economic and financial states of affairs, (not ones that we express publicly as a company, anyway). We do believe, however, that people can and do appreciate a variety of perspectives. What you’ve just read is the perspective of our resident chief economist. While we think he’s very smart, Macrobond Financial does not expressly endorse the views he presents here. And, as the old adage goes, you shouldn’t believe everything you read (not without finding the data, performing a few analyses and presenting it in a nice chart). We want to make it clear that we are not offering this information as investment advice. That being said, if you have the application you can easily check everything that’s mentioned here, and decide for yourself. If you don’t have the application, now you have a great reason to get it.