GOOD TIMES

The global economy may be in better shape than we think

The global economy is doing well, and that might be an understatement.

In its latest World Economic Outlook, the IMF raised expectations for global economic growth this year to 3.5%, up a bit from its last forecast in October. The improved outlook is mostly due to increased optimism about consumer demand in advanced economies, higher commodity prices, and the prospect for increased spending and lower taxes in the US. The IMF expects 2018 to be even better, with growth of 3.6%. That would be the best global growth rate since 2011.

Still, the IMF remains anxious. Its analysts see more downside risks than upside ones. Increasing income inequality, low productivity growth, political tensions in the Middle East, and the specter of a rise in protectionism all threaten the institution’s rosy outlook.

Despite all this, there is reason to think the IMF is not optimistic enough. Gavyn Davies points out in the Financial Times (paywall) that “nowcasts,” which are forecasting models that estimate economic growth using real-time survey indicators, suggest the IMF vastly underestimates the global economy’s strength. The nowcast from Fulcrum Asset Management (pdf), where Davies is chairman, estimates that the global economy is currently growing at the brisk pace of 4.4%. Fulcrum projects that global growth will average out to 4% for 2017 and 4.2% in 2018.

The relative strength of nowcast projections compared with more staid IMF forecasts are a result of ebullient consumer and business confidence surveys, particularly in the US. Nowcasts, like those from Fulcrum and the Federal Reserve Bank of New York, rely heavily on “soft” survey data, as it has proven useful in improving the accuracy of projections (pdf). The IMF’s widely followed projections typically rely more on “hard” data, like industrial production or employment statistics, which are backward looking and published with a lag to soft data.

There are reasons to doubt the accuracy of nowcasts, too. Many observers believe American consumers and businesses are irrationally exuberant about president Trump’s ability to cut taxes, reduce regulation, and boost infrastructure spending. As a result, there is little reason to believe that anything fundamental has changed about the US economy following last year’s election.

What’s more, survey data has led nowcasts astray before. For example, downbeat surveys following the UK’s vote to leave the EU led nowcasts to underestimate UK growth. Yet, for the most part, nowcasts tend to outperform projections that don’t incorporate survey data. Even the IMF is moving towards using more nowcasting methods in its forecasts.

Even if the soft data overstate the strength of the global economy, the hard data appear to be understating it. And the middle ground between these forecasts suggest that global growth is stronger than it has been for some time.

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