The recession and Bangladesh
The IMF publishes forecasts for the world economy twice a year. After its April release, I wrote a piece for Daily Star Forum asking ‘How will the global economic slowdown affect Bangladesh?’ — here is the piece. The October forecasts have recently been published, and this post revisits the question. Outlooks for the world economy has been revised downward sharply in the past 6 months. These are detailed first.
Then we turn to the outlook for Bangladesh. While the IMF has revised its 2008 forecast upward, 2009 is now expected to be weaker than thought earlier. Unfortunately, they don’t actually discuss their numbers, but the ADB does. The ADB’s latest forecasts for Bangladesh are actually quite optimistic for the financial year 2008-09. After summarising the ADB’s analysis, I finish with some comments – inflation is expected to remain stubbornly high – and note potential risks to the outlook. It seems to me that the IMF numbers are more likely to come true.
In the Forum piece, I said: A recession appears to be imminent in the United States — the question now is about its severity and length. Well, words on the street is that the authorities are debating whether the recession commenced in November 2007 or June 2008. Most of the advanced economies are now expected to be in recession before the year is over. And 2009 looks to be a very bleak year according to the IMF’s fortune tellers (Table 1).
Six months ago, there was a lot of discussion about the decoupling hypothesis — the idea that major Asian emerging economies like China and India, but also the smaller ones such as the NIEs or the ASEAN-5, have matured enough so that a US recession would not affect them as much as was the case in the past. Well, few believe that any more, except maybe when it comes to China — Martin Wolf of the Financial TImes put it as a wish-dream. And this is apparent in the downgrading of forecasts for major Asian economies.
Unless you’ve lived in Mars for the past month, these forecasts won’t surprise you. The IMF publication begins thus: The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. In fact, I’m not sure we’ve ever witnessed the events of the past 6 weeks: near collapse of the financial system in the world’s most advanced economies, de facto nationalisation of banks, unprecedented injection of liquidity into the system, trillions of dollars worth of wealth being wiped out in days, wild swings in the foreign exchange, equity and commodities markets — these are the stuff our nightmares are made of.
It is then not very surprising that the IMF has revised their outlook for 2009 downward. It is, however, quite interesting that views about 2008 have improved a bit, and both the ADB and Consensus — a collection of market forecasts — have a pretty sanguine view in the near term. Table 2 lists these forecasts.
Unlike the IMF, the ADB does publish a chapter on Bangladesh. Their story underlying the 6.2% growth in 2007-08 financial year is summarised below.
- Agriculture and services performed stronger than expected in early 2008. A bumper boro harvest underpinned the agricultural recovery from the impacts of Sidr, while transport, distribution trade and telecommunications were the well-performing services.
- Consumption remained strong, while investment — whether public, domestic business, or foreign direct — fell.
- Trade deficit widened as imports outstripped export. However, robust remittance growth offset the trade deficit to put the current account in surplus.
The ADB’s forecast for 2008-09 is 6.5% — unchanged from six months earlier, and is quite optimistic given the world recession. Their story is underpinned by: a forecast manufacturing recovery, with growth reaching the pace recorded before recent politicial upheavals upset production, on the back of strong export performance (of garment and knitwear); continuing service boom, with consumption being supported by continued remittance growth; and an investment recovery.
Before we discuss this rosy outlook, a few points about other matters.
- Inflation is expected to remain high by everyone (Table 3).
- The ADB notes that the Bangladesh Bank had an accommodative stance in 2007-08. Its quarterly publication on Bangladesh also has good discussion of the Budget. We discussed monetary policy here and the Budget here.
- According to the ADB, ‘…power supply is likely to improve somewhat in FY2009 with several public and private sector projects coming on stream’.
So, what to make of this forecast? I’m sure the ADB guys spend a lot more time and effort in analysing the Bangladeshi economy than I do (I don’t get paid for this). But it seems to me that their export story is way too optimistic. And this is not suprising when we look at their 2009 forecasts for the US (1%) and the Euro Area (1.4%). The US accounts for a quarter of our exports, with the Euro Area and the United Kingdom making up another third. The ADB has these advanced economies growing at a moderate pace, the IMF sees them stagnating. What gives? It seems to me that coming out in September, the ADB couldn’t update their numbers for the meltdown that followed the Lehman Brothers collapse.
I can only infer that the IMF numbers have a weaker exports profile. I’ve heard that our exports are mainly to the budget end of the consumer market in the US and Europe, and perhaps the recession won’t affect us as much. I defer to people who know better about this stuff, and would appreciate being enlightened.
Meanwhile, I think a similar reappraisal is warranted for the remittances supporting consumption and services story. And yet another channel through which the recession can affect us is confidence. A confidence collapse would most likely manifest through sell offs in the equity or foreign exchange market. Fortunatley, both the taka-dollar rate and our share market seem to be doing okay so far, leading a commentator in a different forum gingerly ask: time for a correction (“the best short”), or the
positives of having little foreign involvement?
I don’t know enough to answer that question, but it seems to me that the IMF numbers are going to be closer to the mark. Of course economists have a rather dubious record of forecasting — not because we’re stupid, but what we do is hard, that’s what my boss says. Still, I think the outlooks make it very difficult for the incoming administration — in Dhaka as well as in Washington DC.
(Cross-posted at UV).