IMF scores better on policy prescriptions than economic projections

The IMF has just issued its latest set of economic forecasts.

It expects the global economy to grow by 3.2% this year, with growth reaching 3.5% next year.

The champagne is being kept on ice and rightly so, however.

Maurice Obstfeld, the fund’s director of research, was pretty downbeat describing the situation as “somewhat fragile”. He listed a whole series of downside risks.

The organisation is covering its back — and with good reason. After all, economists have a poor record when it comes to forecasting.

Besides, our globalised world is looking particularly dodgy right now what with Isis attacks, floods of refugees, the impact of climate change and the upcoming British referendum.

Like the proverbial party bore, one could go on and on.

We lap up all these economic forecasts, but are they worth the paper they are written on?

In April 2008, economists failed utterly to forecast the looming financial and economic crash.

The IMF in recent years has tended to be over-optimistic in its growth predictions.

Where the fund scores better is in its policy prescriptions.

Under the direction of current director, the former French finance minister, Christine Lagarde, and her controversial predecessor, Dominique Strauss-Kahn, it has become more thoughtful, less macho, in approach.

Where the IMF once prescribed a harsh diet of welfare cuts, privatisation, and charges for essential services in return for bailout funds, nowadays its approach is much more nuanced, with a strong dash of social democracy built into the package.

It backs a three-way mix of monetary easing, fiscal expansion where circumstances permit, and structural reforms.

Obstfeld and his colleagues are guided by their concern at the spread of deflation against a background of overhanging debt and they warn of “more protracted recessions in emerging market economies currently experiencing stress”.

The global debt has risen to almost 300% of annual output.

The response of the central banks has been to slash the cost of money for financial institutions.

A byproduct of this approach has been the generation of yet another asset bubble with few signs of a rise in productive investment.

The IMF is light on prescriptions on how best to reverse this trend.

While it accepts that emerging market economies have, to date, avoided capital flight despite falling commodity prices, domestic political disruption and a drop off in inward investment, the concern is that these nations’ luck may not hold.

Last August and again in January, markets tumbled on the back of concerns over China and the fall in the price of oil and other commodities.

The markets recovered, but stock prices are still well off peak levels achieved a year ago.

The IMF frets about the possibility of a “disorderly pullback of capital flows” and a ‘flight from riskier asset classes”, beginning in particularly vulnerable economies.

It also singled out the possibility of a vote in favour of a British exit, warning that protracted negotiations in the wake of such a vote would lead to an “extended period of heightened uncertainty”.

The fund has joined a lengthening list of business and political supplicants seeking a British vote to remain in the EU on June 23.

Among those backing the ‘remain’ camp in recent days have been: US president Barack Obama; Ryanair chief executive, Michael O Leary; firebrand former Greek finance minister, Yanis Varoufakis; and Labour leader, Jeremy Corbyn.

The IMF believes that the best strategy is to work on building a firewall enabling the global economy to better cope with what are sometimes described as ‘black swan’ events.

‘Supply side’ reforms are seen as critical, but it is accepted that problems can result in the short term.

For example, easíng labour market inflexibility may help job creation in the longer run but in the short term, it can result in a surge in layoffs, hitting economic activity while fanning popular discontent.

Likewise, the benefits from deregulating product markets are long-run benefits.

In the short run, it can lead to incumbents downsizing their operations.

Our social media-driven political environment now means that few rulers have the necessary space in which to take tough decisions leaving us in the state of drift much commented upon.

But the IMF points out that some structural reforms, properly implemented, can assist governments to secure the backing of their electorates.

A case in point: measures to raise the participation of under-represented groups in the workforce, including females as well as the young and the rather old.

The IMF proposes greater investment in childcare to ensure enhanced availability at a reduced cost, allowing second earners to return to the workforce.

It also recommends the active labour policies put in place by countries such as Denmark and Sweden which, since the 1980s, have moved away from the cradle to grave welfare economics previously in vogue.

A cut in marginal taxes on second earners and on older workers enjoying pension incomes is also suggested.

The IMF believes that stronger in-work benefits and a higher minimum wage would encourage more people to join the US workforce.

EU governments are advised instead to prioritise structural reforms, making full use of flexibilities built into the EU Stability and Growth Pact.

In their view, the single market is far from completion.

It calls for a “strong push to complete the single market in services, capital, transport, energy and digital technology, as a means of promoting productivity enhancing integration”.

There is hardly any need to spell out the alternative scenario should the current period of relative drift be permitted to continue.