by Maurice Obstfeld, Oya Celasun, Mandy Hemmati and Gian Maria Milesi-Ferretti

IMF data showed that the dollar value of ‘planetary GDP’ fell in 2015, but the IMF projects that world real GDP growth and inflation will be positive. This column notes that there is no inconsistency here.

The decline in the dollar value of ‘planetary GDP’ reflects the 2015 increase in the value of the US dollar, not calculation errors or inconsistencies between real growth, inflation, and nominal GDP projections. The choice of numeraire matters in measuring nominal GDP growth, especially in years with very large currency movements such as the ones we have seen this year.

A recent VoxEU column (van Bergeijk 2015) noted the projected 4.9% decline in 2015 world GDP measured in current US dollars in the IMF’s October 2015 World Economic Outlook report (IMF 2015). Given the positive world real GDP growth and positive world inflation rates projected for 2015 in the same report, the author suggested that the IMF forecast may be inconsistent.

We note that this suggestion misses the simple reason why world GDP in current US dollars declined in 2015: the large appreciation of the US dollar—the numeraire currency for nominal GDP in current US dollars—against virtually all currencies in 2015. Against a trade-weighted basket of world currencies, the US dollar stood some 13% higher in the first nine months of 2015 than its average level the year before. Based on estimates in the October 2015 World Economic Outlook, one US dollar could on average buy 19.4% more euros and 14.6% more Japanese yen in 2015 than it did in 2014. The appreciation of the dollar against the currencies of several large emerging market countries was even more dramatic. The dollar strengthened 57% against the Russian ruble in 2015, and 38% against the Brazilian real, for example.

As a result of this US dollar appreciation, the US dollar value of GDP has fallen sharply across the world, even in countries where GDP has grown at a hefty pace in domestic currency terms. If the currency of a country weakens against the US dollar, the dollar value of that country’s GDP will decline mechanically. Table 1 below provides a numerical illustration of this for a selected number of countries. For instance, the table documents that Eurozone GDP dropped 14% in US dollar terms but rose 2.7% in euro terms, with even more dramatic differences between domestic-currency and dollar GDP for Brazil and Russia.