At the same time as lowering its forecast for growth and raising the probability of a global recession from 20 to 33 per cent, the IMF has published a bracing examination of its failures.
Chief economist Olivier Blanchard assigned a couple of his economists, Rupa Duttagupta and Thomas Helbling, to report on why he and his team keep getting it wrong.
Specifically, the IMF has been way too optimistic on global growth every year since 2010 – by an average of 0.6 per cent a year. In 2010 global growth was 5.4 per cent and has declined to 3.3 per cent, which has come as a complete surprise to the IMF.
The analysis shows that IMF got its forecasts for developing countries most wrong and it didn’t predict the severity of the downturn in Europe. The growth shortfalls have been partly explained by lack of growth in trading partners and partly by forecast errors about domestic investment.
So how much weight should we put on the IMF team’s latest attack of pessimism? Well, at least they are diligent and honest, and in any case, grains of salt should always be applied to forecasts, especially about the future. It's the analysis that matters.
The IMF’s official global growth forecast for 2014 is now 3.3 per cent, down from 3.5 per cent in April. Growth is expected to increase to 3.8 per cent next year, 0.2 per cent less than its April forecast.
But as Olivier Blanchard wrote in his blog: “This number hides, however, very different evolutions. Some countries have recovered or nearly recovered. But others are still struggling.”
The US and UK are “leaving the financial crisis behind” and achieving decent growth. Japan is growing but high public debt raises challenges.
For Europe, the IMF has doubled its one-year ahead recession risk to nearly 40 per cent and the probability of deflation 30 per cent.
And this was immediately seen last night in a 4 per cent drop in Germany’s industrial production in August, its biggest fall in five years.
France and Italy are already contracting. The only bright spot for Europe is the devaluation of the currency, which has fallen 9 per cent against the US dollar since May.
Despite the deterioration in Germany’s economy, there is no sign yet that the Merkel Government is rethinking its formula for economic success in the Eurozone of fiscal rectitude and structural reform, but others certainly are. France and Italy have both revised their deficit reduction targets and the unions and the political left are mounting staunch resistance to any reforms.
Germany’s unit wage costs remain well below those of the rest of Europe, thanks largely to its lower house prices, but while the lower exchange rate is helping as well, weak demand both in Europe and China is crushing German exports.
The IMF raises three key risks to its outlook, of which a stalling of the recovery in the euro area is one. Says Blanchard: “This is not our baseline, as we believe fundamentals are slowly improving, but, were it to happen, it would clearly be the major issue confronting the world economy.”
The other two risks are complacent financial markets (“policymakers should be on the lookout”) and geopolitical risks, which are not having much impact at the moment, but “clearly, the risk that they do so in the future is there, and could affect the world economy in a major way”.
The IMF has also included an update on global housing markets in last night’s World Economic Outlook.
In short, it says there are two speeds: “rebounded” and “recovering” (a euphemism for falling, it seems):
Australia, of course, is in the “rebounded” group, but the short paragraph of commentary on our housing market is unperturbed:
“The rise in prices is concentrated in Sydney, Melbourne and Perth. It has not been accompanied by an overall increase in leverage. Credit growth is moderate, and many households continue to pay down debt.”
In fact, it is clear from reading the commentary on the other countries whose housing markets have rebounded, that the IMF seems to be about the least worried about Australia’s.