In his latest projections, The IMF estimates that the world will grow 3.2% in 2025, with a notable difference between advanced economies (1.8%) and emerging markets and developing economies (4.2%). The United States and China, specifically, would grow by 2.8% and 4.8%, respectively. Brazil and Mexico, the two largest Latin American economies, would grow 3.0% and 1.5%, respectively (2.1% for the region as a whole, also incorporating the Caribbean). The projection for Argentina is very optimistic and remains around 5%.
Economic agenda. These data are very important for decision making. From a business perspective, specifically, they offer indications about the future behavior of consumption and demand, beyond the obvious differences that exist when comparing sectors. For the public sector it is key because it allows projecting, for example, tax collection.
But an elementary question arises: how reliable are these numbers? In principle, greater knowledge of economics and the availability of more sophisticated statistical tools would lead one to assume that the margin of error should be low. It is evident that these projections can never be completely accurate because, at the end of the day, it is about projecting the behavior of a social science. Economic growth depends on the decisions of millions of consumers and businesses (and a few governments) that, in many situations, are far from rational. Not to mention critical events with a low probability of occurrence (the famous black swans, such as a pandemic or a war), which can radically alter any type of projection.
The truth is that projections fail, a lot. Let’s look at some examples. In recent years, IMF projections have notably underestimated US growth. In October 2022, 1% growth was projected for 2023, but effective growth ended up being 2.9% (almost triple). In October 2023, the projection for 2024 anticipated growth of 1.5% and effective growth would have been around 2.9% (almost double). Something similar happened for other major world economies. And in the case of emerging and developing economies, the errors are not negligible.
In favor of the IMF, it must be mentioned that the behavior of the world economy in recent years has been quite disconcerting. The classic macroeconomics manuals express in a very consistent way what we should expect in the behavior of the main macroeconomic variables when, for example, important changes occur in economic policy.
For example, if a central bank increases the reference interest rate, we should expect a decrease in the production of goods and services (or at least lower growth) due to the impact that said variation produces on consumption and investment and, as consequently, an increase in unemployment. At the beginning of 2022, the Federal Reserve began to increase the interest rate aggressively (by about 5 percentage points in less than a year) in response to the increase in inflation that had been recorded since the beginning of 2021. (and which increased from 1% to 8% year-on-year in a matter of months). History shows that when something similar happened, the United States went into recession and unemployment rose—exactly what economic theory predicts. In the last six decades, almost every episode of interest rate increases triggered a recession in the United States. Specifically, there have been 9 recessions since 1960. And in each of them, world GDP also contracted or at least slowed down.
Again, the exception. But this time something went wrong. At the beginning of 2022 unemployment was below 4%, a value that many economists consider to be full employment. And it remained below that level until mid-2024, when it very slightly exceeded that threshold again. The recession never came.
Was it a mistake? Or are economies becoming increasingly unpredictable in the short term for some unknown reason? What is happening? Does the economy work differently? Should we no longer expect some variables to respond as they always have to changes in economic policy? And if so, how valid are the projections then?
The previous brief analysis does not make economic projections useless because the fundamental thing is always to guess, under normal conditions, in which direction the economy will move. The question of hard numbers is important, but not as important as understanding the various scenarios and their respective probabilities. For an entrepreneur who must choose to locate investments between Argentina, Colombia or Peru, understanding the general direction of economic policy and its expected effects on variables such as growth and inflation is the most important thing.
But it is also very important to assume that the economy has changed and is moving in a direction where services and technology are fully impacting the way business is done. In practically all countries in the world, services already contribute more to the GDP than any other sector and new technologies are allowing their contribution to exports to become increasingly greater..
According to World Bank data, services represent approximately 75% of GDP in high-income economies, 58% in upper-middle-income economies, 52% in lower-middle-income economies, and 43% in low-income economies. . But even in the case of the latter, they already contribute much more than the agricultural sector (29%). The change. Only two decades ago the situation was different. This does not imply that the industry is contracting, but simply that services are growing faster. In short, this amounts to a profound structural transformation with evident effects on the relationships between macroeconomic variables and their response to changes in economic policy.
Above all, if these services are increasingly influenced by new technologies, such as Artificial Intelligence (AI). The collaborative economy, for example, formed by economic agents who rent or share their assets and enhanced by the dissemination of digital platforms and devices, was giving rise to a new type of consumer, more focused on cooperation and a change in attitude towards property, for example. How can we expect this “new economy” to work in the way we have been accustomed to until now?
These two simple examples, that of the transition towards services and that of the role of new technologies with a high impact on consumption and the way markets function, suggest that something fundamental is changing in the economy.. The fundamental predictions of economic theory are likely to hold but projection errors will persist and even increase. But so that these errors are minor, and always considering “normal” scenarios (without “black swans”), incorporating the most recent transformations is essential. Seen this way, Understanding how the economy works and using this understanding to make decisions has never been more important.
*Lucas Pussetto is Professor of Economics at the IAE Business School.
by Lucas Pussetto
