Reading tea leaves

Forecasting is always a tricky business; at times of crisis, when policies and growth rates are balanced on a knife edge, it’s so tricky that it’s something of a waste of time. Fortunately, it’s not as if the IMF, which released its most recent forecasts of world growth — into financial year 2009 — has anything else on its plate, like saving international finance, for instance. The IMF’s forecasts are what the Australian prime minister, with the sort of understatement generally considered uncharacteristic of Australians, has called “gloomy”: advanced economies will grow slowly in 2008 and actually shrink in 2009, and the developing world will do poorly as well. India, in particular, is projected to grow at 6.3 per cent; China at 8.5 per cent. The former is 0.6 per cent less than the previous forecast and the latter 0.8 per cent less. And all of it is about as reliable and accurate as your horoscope. Estimates released by the unwary of future Indian growth vary widely. The Asian Development Bank expects 7.4 per cent in 2008 and 7 per cent in 2009. The RBI’s governor believes that 7.5 to 8 per cent is the “best growth estimate”, even though he admits that other bodies have come out with estimates ranging from 7 per cent to 8.7 per cent. There’s a reason for this dramatic variance: decent economists see enormous variances in their results at knife-edge times. Good economists wouldn’t even publicise such flawed estimates, let alone have massive press conferences about them at a time of crisis. In its defence, the IMF does admit that the economic outlook is “extraordinarily uncertain”. This is, of course, the case, and even more so for India. The Economist Intelligence Unit has pointed out that much depends on exactly how the financial crisis is handled. If it is managed to ensure that only a short and shallow slowdown in credit occurs, markets remain buoyant; else results will be closer to the IMF’s pessimism. The Fund’s statistics were accompanied by a call from its chief economist, Olivier Blanchard, for stronger macroeconomic intervention — and fine print that the IMF’s figures “assume that policies do not respond to the latest deterioration in global growth prospects.” In other words, the IMF chose to make the strongest possible assumptions — but didn’t really make it clear to the world media that they were telling them a worst-case scenario....