What is Mona Lisa doing right now? The most renowned painting in the world initially gives the impression that it is smiling. Upon second glance, her smile disappears. The smile that returns the following time is a different one. Leonardo da Vinci created this ambiguous effect by blending the contours around Mona Lisa’s face with sfumato. No matter how often you look, you are never exactly sure what is going on.
The economy following the COVID-19 pandemic is like the Mona Lisa. You always notice something new when you look. Many economists are now persuaded that the global economy is going into a “hard-landing” recession as a result of the upheaval in the banking sector. Few economists seem to anticipate a “no-landing” scenario, in which the economy is unaffected by rising interest rates. This new term was derived a few months ago, and it replaced the widely held belief that a mild recession was inevitable at the end of last year.
In short, forecasting has never been more difficult. The analysts’ range of forecasts for American quarterly GDP growth was twice as wide in 2018 as it was in 2019. In the International Monetary Fund’s most recent global economic outlook, the word “uncertainty” is mentioned more than 60 times, which is roughly twice as many times as in April and October 2022. No one had any idea what the Federal Reserve would do with interest rates in March when the financial crisis hit, investors predicted a rate rise, a rate freeze, or a rate cut, and the following few sessions look equally unexpected.
At the European Central Bank’s most recent monetary-policy meeting, Christine Lagarde, its president, was blunt about her institution’s role. She stated that currently, it’s not possible to determine what the path will be going forward.
Official statisticians are having trouble making sense of the situation. As new statistics become available, they routinely revise their estimates of anything from the gross domestic product to employment. But a significant change has occurred. The euro area’s GDP revisions are four times larger than usual. The British statistics agency published some significant modifications in March. The report revealed that real business investment was not 8% lower than previously thought, but rather in line with its pre-pandemic level. Australian statisticians cut their projection for productivity growth in the third quarter of 2022 by more than half in April. The same year America’s Bureau of Labour Statistics (BLS) issued revisions to its estimate of nonfarm payrolls (not adjusting for seasonality) of 59,000 a month between the first and third estimates, compared with 40,000 in 2019.
What is happening? Maybe everything is just more unstable. Europe had its largest war in seven decades, supply-chain bottlenecks, an energy crisis, and banking panic in the previous year. Only somewhat more stable has been the remainder of the rich world.
Yet there are also deeper changes at play. The first is about disruptions in COVID-19. As lockdowns came and went, the world lurched from plummeting to soaring growth. The “seasonal adjustments” that are often made to GDP data have been severely impacted by this. The BLS modified the parameters it uses to calculate inflation in February, which makes it considerably more challenging to evaluate monthly figures. In the fourth quarter of 2022, annualised core inflation increased from 3.1% to 4.3%. It is also more challenging than usual to comprehend inflation in the eurozone. Kamil Kovar, a consultant at Moody’s Analytics stated that depending on how seasonal adjustment is done, core month-on-month inflation in March was as low as 0.2% or as high as 0.4%.
The second change concerns sample sizes. The pandemic hastened a pattern in which an increasing percentage of people refuse to participate in official polls. In America, the survey response rate that was used to estimate the number of openings dropped from a little over 60% before the pandemic to about 30%. After COVID, the response rate to Britain’s labour-force survey decreased by around half. There were some business closures during lockdowns. People stopped filling out questionnaires on a regular basis. People no longer want to assist statisticians because of a rise in public distrust of the government.
Falling response rates certainly increase data volatility. They may also lead to prejudice. The people who stopped doing surveys appear to be less wealthy than those who still do, boosting income in error. According to Jonathan Rothbaum of the Census Bureau, after adequate corrections for non-response, the actual median household income growth in America from 2019 to 2020 was 4.1%, not the 6.8% that was initially reported. Non-response has continued to increase income statistics by roughly 2% after 2020. According to a report from the consultancy Inflation Insights, Omair Sharif, adjusting for “non-response bias” may also have played a role in the recent significant changes to American earnings statistics.
The difference between “hard” and “soft” data—objective measures like the unemployment rate and subjective indicators like people’s future expectations—is the third source of confusion. The two types typically move in unison. They are currently far apart. “Soft” actions appear to be recessionary. “Hard” metrics indicate a respectable expansion. The disparity could be a result of consumers being frustrated with inflation. Prices in the developed world continue to increase by 9% annually.
Economists say that investors and statisticians will get better at understanding the world economy during periods of volatility and inflation. As the effects of the pandemic fade, so will distortions to seasonal adjustments. Incorporating alternate data into estimates has already helped economists overcome the issue of dwindling response rates. However, this offers little solace to organisations that need to make choices straight away, as well as to those who are only attempting to stay up to date on the news. Do not be surprised if the global economy remains sfumato for some time, experts suggested.
Weak economic growth in MENA
Meanwhile, experts also divided on their economic predictions for the MENA region. Around 45% of those surveyed said it is likely and the same proportion said it is unlikely, according to the latest Chief Economists Outlook report by the World Economic Forum.
Saadia Zahidi, the forum’s managing director said that the latest edition of the Outlook highlights the uncertainty of current economic developments. Although there were some encouraging indicators in the quarterly report’s May 2023 edition, the upheaval in the banking sector this year has negatively impacted worldwide prospects. Nearly 80% of chief economists think that managing inflation and preserving financial stability are trade-offs that central banks must make, and a comparable percentage predicts that central banks will have difficulty achieving their inflation targets.
Even while the majority, around 69% think that the recent financial sector disruption was an isolated incident rather than a systemic problem, they nevertheless expect more bank failures this year. The outlook for growth has become more stable since the January release of the last Outlook report, but regional variations remain significant. The strongest resurgence is projected for Asia, with China playing a significant role in its recovery. In actuality, the vast majority of leading economists anticipate a sizable recovery in China this year. Furthermore, in East Asia and the Pacific as well as South Asia, more than 90% anticipate at least moderate growth.
The outlook for other parts of the world is less optimistic, with more than half of top economists anticipating weak growth in Latin America, the Caribbean, and sub-Saharan Africa, and 75% of them predicting weak or very weak growth in Europe. There are a variety of forecasts for the Middle East and North Africa region, with 36% of respondents anticipating weak growth, 32% anticipating robust growth, and 32% expecting moderate growth. The research claims that the agreement by OPEC+ to reduce oil output has had an impact on regional prospects. This is partly because the Saudi Arabian gross domestic product predictions from the International Monetary Fund have been revised downward from 8.7% growth in 2022 to 3.1% growth in 2023.
Despite the improving views on US growth, not all economists are on the same page. Around 76% of them are expecting the cost of living to stay high. This problem, along with high inflation has been a huge concern. For instance, food costs soared by 46% across the Middle East and Central Asia recently. In this case, experts think that raising interest rates is the only solution.