Everybody makes duff forecasts. Everybody gets it wrong from time to time. Only the inveterate fence sitters are spared having egg on their face.
The International Monetary Fund certainly knows what it is like to make a mistake. In the run-up to the EU referendum, the IMF made a series of interventions warning voters of the dire consequences that would follow a vote to leave.
At first, the IMF stuck to long-term forecasts, saying investment and trade would eventually be weaker if the UK divorced from the other 27 members of the EU. But as the referendum neared and the vote was on a knife-edge, the warnings became more lurid. The UK would immediately start sliding into recession. House prices would crumble. Shares would crash.
So what do you do if your forecasts turn out to be a little wide of the mark? Either you put your hands up and admit you were wrong. Or you brazen it out. You say that it is too early to say. You say that eventually you will come right.
No prizes for guessing which option the IMF has taken. Its half-yearly world economic outlook (WEO) report says the UK will do fine in 2016 but is going to find the going a lot tougher in 2017.
This is a perfectly respectable view, and one held by a host of academic, business and City economists. Had the IMF stuck to this sort of assessment throughout the referendum campaign, it would have saved itself embarrassment now. As it is, it will get some stick from those who thought the Washington-based fund had overstepped the mark in its support for the remain camp.
Sadly, the furore over the IMF’s Brexit predictions may well overshadow the more interesting aspects of the WEO. It is true, for example, that the vote for Brexit was the result of almost a decade of flatlining average incomes since the financial crisis, which has bred hostility towards elites, globalisation and immigrants.
Maurice Obstfeld, the IMF’s economic counsellor, rightly noted: “Similar tensions afflict the US political scene, where anti-immigrant and anti-trade rhetoric have been prominent from the start of the current presidential election round. Across the world, protectionist trade measures have been on the rise.”
All this is quite true. The IMF identifies “political discord and inward looking policies” as one of the two big risks to its prediction that global growth will increase slightly from 3.1% to 3.4% next year; the others being stagnation in advanced economies.
These two factors are, of course, interlinked. If western economies continue to struggle, protectionist pressures are going to rise. They will also make it more likely that the other risks identified by the IMF – a sharper slowdown in China and financial trouble in the emerging markets – will crystallise.
The solution, the IMF says, is a three-pronged approach rather than the continued reliance on central banks, with their ultra-low interest rates and money creation schemes. Governments have to loosen fiscal policy (cut taxes and increase spending) where there is scope to do so, and reallocate spending towards growth-enhancing sectors where there is not.
Finally, there have to be measures aimed at supporting those harmed by economic change, whether as the result of globalisation or technological overhaul, such as stronger welfare nets and more progressive income tax regimes.
One explanation for the IMF’s hyperbolic warnings about the immediate impact of the Brexit vote is that it thought the expected remain vote would mean they would never have to be justified. Now that it has, the IMF is terrified because it sees the UK referendum as symptomatic of something deeply dysfunctional about the global economy it has helped to shape in the past four decades. Which indeed it is.
guardian.co.uk © Guardian News and Media Limited 2010
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