In April 2010, when the global economy was beginning to recover from theshock of the 2008-2009 financial crisis, the International Monetary Fund’s World Economic Outlookpredicted that global GDP growth would exceed 4% in 2010, with a steady annualgrowth rate of 4.5% maintained through 2015. But the forecast proved to be fartoo optimistic.

In fact, global growth has decelerated. In its most recent WEO, theIMF forecasts global GDP to grow by only 3.3% in 2012, and by 3.6% in 2013.Moreover, the downgrading of growth prospects is remarkably widespread.

The forecast errors have three potential sources: failure to recognize thetime needed for economic recovery after a financial crisis; underestimation ofthe “fiscal multipliers” (the size of outputloss owing to fiscal austerity); and neglect of the “world-trade multiplier”(the tendency for countries to drag each other down as their economiescontract).

For the most part, the severity and implications of the financial crisiswere judged well. Lessons from the October 2008 WEO,which analyzed recoveries after systemic financial stress, were incorporatedinto subsequent forecasts.

As a result, predictions for the United States – where householddeleveraging continues to constrain economic growth – have fallen short onlymodestly. The April 2010 report forecast a US growth rate of roughly 2.5%annually in 2012-2013; current projections put the rate a little higher than2%.

By contrast, the fiscal multiplier was seriously underestimated – as the WEOhas now recognized.Consequently, forecasts for the United Kingdom – where financial-sectorstresses largely resembled those in the US – have been significantly lessaccurate.

The April 2010 WEO forecast a UK annual growth rate of nearly 3% in2012-2013; instead, GDP is likely to contract this year and increase by roughly1% next year. Much of this costly divergence from the earlier projections canbe attributed to the benign view of fiscal consolidation that UK authoritiesand the IMF shared.

Likewise, the eurozone’s heavily indebted economies (Greece, Ireland,Italy, Portugal, and Spain) have performed considerably worse than projected,owing to significant spending cuts and tax hikes. For example, Portugal’s GDPwas expected to grow by 1% this year; in fact, it will contract by a stunning3%. The European Commission’s claim that this slowdown reflects highsovereign-default risk, rather than fiscal consolidation, is belied by the UK, where the sovereign risk is deemedby markets to be virtually nonexistent.

The world-trade multiplier, though less widely recognized, helps toexplain why the growth deceleration has been so widespread and persistent. Whena country’s economic growth slows, it imports less from other countries,thereby reducing those countries’ growth rates, and causing them, too, toreduce imports.

The eurozone has been at the epicenter ofthis contractionary force on global growth. Since eurozone countries tradeextensively with each other and the rest of the world, their slowdowns havecontributed significantly to a decrease in global trade, in turn underminingglobal growth. In particular, as European imports from East Asia have fallen,East Asian economies’ growth is down sharply from last year and the 2010forecast – and, predictably, growth in their imports from the rest of the worldhas lost momentum.

Global trade has steadily weakened, with almost no increase in the lastsix months. The once-popular notion, built into growth forecasts, that exportswould provide an escape route from the crisis was never credible. That notionhas now been turned on its head: as economic growth has stalled, falling importdemand from trade partners has caused economic woes to spread and deepen.

The impact of slowing global trade is most apparent for Germany, which wasnot burdened with excessive household or corporate debt, and enjoyed afavorable fiscal position. To escape the crisis, Germany used rapid exportgrowth – especially to meet voracious Chinesedemand. Although growth was expected to slow subsequently, it was forecast atroughly 2% in 2012-2013. But, as Chinese growth has decelerated – owing partlyto decreased exports to Europe – the German GDP forecast has been halved. And,given that this year’s growth has largely already occurred, Germany’s economyhas now plateaued – and could even be contracting.

In good times, the trade generated by a country’s growth bolsters global growth. But, in times of crisis, thetrade spillovers have the opposite effect. As the global economy has becomeincreasingly interconnected, these trade multipliers have increased.

Indeed, while less ominous and dramaticthan financial contagion, trade spillovers profoundly influence global growthprospects. Failure to recognize their impact implies that export – and, inturn, growth – projections will continue to miss the mark. The projectedincrease in global growth next year will likely not happen. On the contrary,policy errors and delays in individual countries will seriously damageeconomies worldwide.