The International Monetary Fund certainly knows what it is like to make duff forecasts. It made its latest of these in the run-up to the EU referendum, when 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.
In its half-yearly world economic outlook (WEO) report the IMF says the UK will do fine in 2016 but is going to find the going a lot tougher in 2017.
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 austerity.
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.
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.
Source: The Guardian
