A Mug’s Game

11/07/2010 at 10:42 pm 3 comments

Or “economic forecasting”, as it’s also known.

Last week saw the publication of the latest quarterly survey from the IMF, which has made headlines around the world. (Who would have thought that a brief time ago this organisation was being written off as obsolete?) For the world the major news was that the Fund’s growth forecast for 2010 has been revised up, from 4.2% to 4.6%. For Britain, the news was not so good: our growth for this year has been revised down a little (from 1.3% to 1.2%), and for next year by a fair old chunk (2.1% plays the 2.5% the Bretton Woods relic was predicting three months ago).

This seems odd. Yes, Britain’s coalition government recently added some numbers to its commitment to fiscal tightening. Yes, if one inputs lower government spending numbers into a growth forecasting model, said model could well produce a lower aggregate number. But why single Britain out .. ?

As the IMF say in their own report:

the overarching policy challenge is to restore financial market confidence without choking the recovery.

Much of the world is scrambling to do this. Even in Japan, which hasn’t run a budget surplus since 1992 and which hasn’t been demonstrably harmed by its sumo-sized debt burden, they’ve started to consider the possibility of thinking about paying some borrowing back. Opinion is at best divided on the impact of fiscal “austerity” / realism on aggregate demand in economies whose private sectors have returned to positive growth.

So for the IMF to turn all pessimistic on Britain while acknowledging that their previous global forecast for growth was too tight seems a little churlish while most other countries are either trying to tighten spending – or actually doing it – too.

If you want to be really pessimistic about the future, forget about the impact of government austerity. Consider what might happen should austerity measures fail, through being too politically difficult to implement.

The debate doesn’t seem to have moved on that far yet. Predicting that countries with clear deficit reduction targets might choke off a bit of growth, well – that might be contentious, but .. Trying to predict which countries – out of almost all of them – will fail to deliver on deficit reduction and precipitate worries of another sovereign crisis? That, frankly, is a mission for the real IMF.

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