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Kenneth Rogoff made his media debut yesterday to present the IMF's twice-yearly economic outlook. He boldly told a packed Washington news conference he thought a recession in the United States was "a done deal." Fifteen minutes later, he recanted.
How do you forecast what will happen to the global economy if the U.S.-led coalition invades Afghanistan or there are more terrorist attacks in the United States?
Black & White Photo: Steven Purcell, Bloomberg News / Kenneth Rogoff, centre, IMF chief economist, quickly back-tracked after saying a U.S. recession was a "done deal." He is flanked by IMF directors David Robinson, left, and Graham Hacche at yesterday's news conference in Washington. ; Color Photo: Steven Purcell, Bloomberg News / Kenneth Rogoff, chief economist of the International Monetary Fund, recanted his prediction. ;
When the chief economist of the International Monetary Fund says a U.S. recession is "a done deal" -- and then withdraws the comment 15 minutes later -- you know the dismal science has officially become the impossible science.
Kenneth Rogoff made his media debut yesterday to present the IMF's twice-yearly economic outlook. He boldly told a packed Washington news conference he thought a recession in the United States was "a done deal." Fifteen minutes later, he recanted.
"I have to withdraw my remark 'done deal' simply because we know that growth is going to be lower for the United States, but we simply have no idea of exactly how much lower," he told reporters.
While Mr. Rogoff's faux pas was chalked up to a lack of experience at the IMF's typical practice of sugar-coating bad news, the stumble highlights the quandary economists find themselves in.
While forecasting future economic activity, or lack of it, has often been seen as being one step above tarot card reading, the Sept. 11 terrorist attacks have made the profession almost impossible.
How do you forecast what will happen to the global economy if the U.S.-led coalition invades Afghanistan or there are more terrorist attacks in the United States?
What will be the long-term psychological effect on spending of a trauma witnessed by so many people around the world?
Add in the fact that some markets have behaved in exactly the opposite way history tells us to expect in times of crises -- oil prices have plunged and long bond yields have risen -- and the task becomes harder.
"The nature of economic forecasting is uncertain," said Don Drummond, chief economist at Toronto-Dominion Bank. "But then you've got something that we haven't dealt with in 10 years and that's the uncertainty on the geo-political side."
Most economists have dealt with the uncertainty by hedging their forecasts.
TD bank for example, said in releasing its quarterly economic forecast yesterday, that its outlook is contingent on a "benign outcome in the geopolitical arena."
For its part, the IMF said the Sept. 11 terrorist attack has further increased downside risks for a U.S. economy that was already sharply slowing since mid-2000.
But it added "it is too early to assess the economic consequences."
In its outlook, completed just before the attacks, the IMF said the global economy would grow 2.6% this year, the weakest since 1993 and a hair above the 2.5% that economists say is indicative of a global recession.
It turned to the 1995 Kobe earthquake as its frame of reference. The earthquake cost 5,000 lives, 35,000 casualties and US$120- billion worth of property damage, but it only had a limited impact on output growth.
It notes, however, this time the potential impact on consumer sentiment and spending could be significantly greater.
And that's what is so difficult to predict.
"There's a big fear factor and fear generally leads to paralysis and businesses don't know how to plan," said Sherry Cooper, chief economist at BMO Nesbitt Burns.
Andrew Pyle, senior financial economist at the Bank of Nova Scotia, said institutions are generally reluctant to use to the "R- word" and once the economy is in a recession they are left behind the curve.
"This is what I call adaptive forecasting or forecasters following the economy down," he said.
"This is just like the 1990-91 recession. No one wanted to call it, but once they were in it they had to keep following the economy down."
Mr. Pyle said the prudent thing for economists to do is look at what the worst case scenarios are in terms of spending and consumer sentiment and price that into their forecasts.
"What would be called a risk before should now be part of the base-case forecast," he said.
Black & White Photo: Steven Purcell, Bloomberg News / Kenneth Rogoff, centre, IMF chief economist, quickly back-tracked after saying a U.S. recession was a "done deal." He is flanked by IMF directors David Robinson, left, and Graham Hacche at yesterday's news conference in Washington. ; Color Photo: Steven Purcell, Bloomberg News / Kenneth Rogoff, chief economist of the International Monetary Fund, recanted his prediction. ;
(Copyright National Post 2001)