Missing Growth Multipliers

In its April 2010 World Economic Outlook, the IMF predicted that global GDP growth would exceed 4% in 2010, with a steady annual growth rate of 4.5% maintained through 2015. But the forecast seriously underestimated the tax and world-trade multipliers, resulting in much lower growth than expected.

PRINCETON – In April 2010, when the global economy was beginning to recover from the shock of the 2008-2009 financial crisis, the International Monetary Fund’s World Economic Outlook predicted that global GDP growth would exceed 4% in 2010, with a steady annual growth rate of 4.5% maintained through 2015. But the forecast proved to be far too optimistic.

In fact, global growth has decelerated. In its most recent WEO, the IMF forecasts global GDP to grow by only 3.3% in 2012, and by 3.6% in 2013. Moreover, the downgrading of growth prospects is remarkably widespread.

The forecast errors have three potential sources: failure to recognize the time needed for economic recovery after a financial crisis; underestimation of the “fiscal multipliers” (the size of output loss owing to fiscal austerity); and neglect of the “world-trade multiplier” (the tendency for countries to drag each other down as their economies contract).

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