IMF expects less of the UK and a lot of the US and Europe
- 16 July 2012
- From the section Business
The IMF's updated forecasts for the global economy make for depressing reading for anyone in the UK, but might seem reassuring to anyone concerned with the world recovery as a whole.
For all the sombre talk about the global recovery losing momentum, the Fund has only nudged down its global growth forecast for 2012 and 2013 - and the forecast for just the advanced economies hasn't changed much either.
But beneath the surface there is still plenty to worry about.
Back in the spring, the IMF thought the UK would grow by 0.8% this year and by 2% in 2012, but the new forecast pencils in growth of just 0.2% this year and 1.4% in 2013.
For Labour, and even some senior figures inside the Fund, this downward revision in Britain's economic prospects ought to re-open the argument over the government's deficit plans and the need for a "Plan B".
In its World Economic Outlook last September, the Fund said: "If activity were to undershoot current expectations, countries that face historically low yields should also consider delaying some of their planned adjustment." It specified that the countries it was talking about were Germany and the UK.
At that time, the Fund was expecting the UK to grow by 1.1% in 2011 and 1.6% in 2012. Now we know it grew by 0.7% in 2011 and, as I said, the Fund has lowered the forecast for 2012 to just 0.2%.
So, to say that activity has "undershot" last year's expectations would itself be an understatement.
But, we went through all this at the time of the Fund's Article IV Report on the UK, in May - when, you'll remember, the Fund's managing director Christine Lagarde went out of her way to praise Mr Osborne and his policies.
The government will be trying to sound creative on the subject of growth later this week, when it provides more details of its plans to leverage more private sector infrastructure and housing investments.
But I think we can be confident it won't be described as any Plan B. For its part, the IMF, in a separate update to its fiscal forecasts also released today, describes the government's decision to maintain its medium term target for the deficit as "appropriate".
So much for the UK. What about the rest of the world? Should we be reassured that Britain is the only advanced economy to see a major downward revision in its forecast since the spring? Perhaps. But remember that these revisions are always to some extent a catch-up exercise.
The new global forecasts are broadly stable, only because the start of the year looks better than it did before. The months after the first quarter look a bit worse.
More important, the forecast of 1.4% growth in the advanced economies in 2012 and 1.9% in 2013 assumes that politicians in Europe and America get their act together in avoiding some very real and present dangers.
Looking at the fractious state of political debate on pressing economic issues, on both sides of the Atlantic, you can hardly say that is a sure thing.
As we know, there are a lot of gaps in the agreement hammered out by European leaders at last month's summit, and a lot of doubts about when and how they will take crucial steps like permitting the new European Stability Mechanism bailout facility to inject capital directly into troubled eurozone banks.
Argument is also raging, within and around the European Central Bank, over whether the ECB should do more to help push down borrowing costs for Spain or Italy, for example by buying more of their governments' debt.
But the fears about the eurozone and its financial system, though increasingly apparent in the market, are well known to everyone. What many in Europe have perhaps not focused on enough is the looming "fiscal cliff" in the US.
Without a new agreement on the budget between now and the start of next year, a series of automatic tax rises and spending cuts would lead to drastic budget tightening in the US of 4% of GDP in 2013 alone. As the Fund notes, somewhat unnecessarily, "this would severely affect growth in the short term".
Most people outside the US have always expected this to get sorted out after the general election in November - regardless of who wins. But I can't help noticing, lately, that people closer to the situation, in Washington, are much less confident.
On balance, experienced and sombre folk who have seen a lot of US budget battles come and go tell me they still expect the US to step back from the cliff. In the end, even a very polarised Congress will just about manage to strike a deal, it is thought. But they do not say this with any confidence. The rest of the world should realise it is very far from guaranteed.
We have spent the past 18 months worrying almost exclusively about the eurozone. By the end of the year we might well be worrying about the US.
Update 1700: Jonathan Portes, the director of NIESR and well known opponent of the government's budget strategy, has pointed out an interesting nugget from the IMF's new fiscal report, which I referred to earlier.
In considering the right pace of spending cuts and/or tax rises to meet a given deficit target, it says:
"Within these plans, and to the extent that market financing remains at sustainable rates, adjustment should take place at a steady pace defined in cyclically adjusted terms. On average, an annual pace of adjustment of about 1 percentage point of GDP—as in advanced economies in 2011-13—seems to be broadly adequate in reconciling the need to address the challenge of fiscal consolidation while managing risks to growth."
The Fund's own figures show the UK's cyclically adjusted - or structural - deficit declined much faster than this between 2010 and 2011 - by 1.8% of GDP.
The authors also note that the the structural deficit will fall by much less than this in 2012 and 2013, which they say "is fitting given the weak growth outlook."
So Mr Portes says the IMF's own analysis now suggests the coalition's deficit plan was too front-loaded, even if the IMF cannot or will not admit it.
Treasury officials greatly dispute this, pointing out that the IMF's rough rule of thumb for a 1 percentage point cut doesn't take into account the size of the structural deficit at the start.
The UK clearly needed to move faster, in the Treasury view, because its structural hole was a lot larger than most.
The chancellor would also argue that the UK's cost of borrowing only remained "at sustainable rates" because of the tough stance taken on the deficit - something Mr Portes and other critics of the government would say owes more to the fact that the UK, unlike other high borrowers in the eurozone, has its own currency.
All of which is to say, the debate about deficit strategy is alive and kicking, even if the economy isn't.