IMF Survey: Global Growth Estimates Trimmed After PPP Revisions

IMF News, January 8, 2008

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Based on new statistical calculations of purchasing power parity (PPP) exchange rates published last month by the International Comparison Program (ICP), the IMF has revised downward its estimates for global growth by around ½ percentage point each year during 2002-07.
For example, the IMF's estimate for global growth in 2007 has been revised down to 4.7 percent from 5.2 percent in the October 2007 World Economic Outlook.
The IMF will update its forecast for global growth on January 25. The update will take account of these revised PPP estimates.

The ICP project, coordinated by the World Bank, produces PPP estimates based on statistical surveys of price data for a basket of goods and services for 100 developing countries.
The Eurostat-OECD PPP program provides estimates for another 46 countries.
On December 17 last year, the ICP released preliminary PPP estimates for the 2005 benchmark year, replacing previous benchmark PPP estimates, which date back to 1993 or earlier for most emerging market and developing countries.
The 2003-2007 ICP round that produced the 2005 estimates represents the most extensive and thorough effort ever to measure PPP rates across countries.
New and innovative data validation tools were implemented to improve the quality of the data, which were drawn from regional surveys of prices for more than 1,000 goods and services in countries.
China participated in the survey program for the first time ever, and India for the first time since 1985.

PPP rates are an alternative way of calculating the exchange rate between countries based upon the comparison of prices of similar goods and services in different countries.
The PPP rate is defined as the amount of currency that would be needed to purchase the same basket of goods and services as one unit of the reference currency, usually the U.S. dollar.
PPP-based GDP adjusts for differences in price levels across countries and tends to lead to a more accurate estimate of global economic activity than conversions based on market exchange rates.
Developing countries typically have relatively low prices for nontraded goods and services, so a unit of local currency often has greater domestic purchasing power than implied by market exchange rates; PPP-based GDP takes this into account.

The ICP revisions imply a substantial reduction in the PPP rates of some key emerging market countries and an upward revision in others (including oil exporters).
Downward revisions for PPP-based GDP of two of the world's fastest-growing economies, China and India, are mainly responsible for the overall reduction of global growth estimates.
For 2007:
- China's share of global output is now estimated at 10.9 percent (down from 15.8 percent).
- India's share has declined to 4.6 percent (from 6.4 percent).
- The share of the United States in global GDP has been revised up from 19.3 percent to 21.4 percent.
- China alone contributed nearly 27 percent to global growth in 2007.
The participation of China in the ICP survey for the first time resulted in the downward revision of China's PPP-based GDP for 2005 by around 40 percent.
Despite the downward adjustments, estimates for 2007 indicate that China still ranks as the world's second largest economy, with an almost 11 percent share of world output.
India remains the fourth largest economy with over 4 percent of the world total.

The changes affect both aggregate global growth based on PPP exchange rates and the share of global GDP accounted for by individual countries and groups.
PPP-based GDP estimates provide a more consistent picture of contributions to aggregate economic activity than bilateral market exchange rates, which can move sharply and distort shares.
The revisions highlight the importance of updated and comprehensive price surveys for accurate cross-country comparisons of economic size and growth.

IMF Survey: Global Growth Estimates Trimmed After PPP Revisions