As they say, the IMF used to have problems making up its mind, now it’s not sure. Yesterday, the International Monetary Fund released its latest projections for the global economy, and once again it reduced its estimates for most economies across the world.
Last autumn, the IMF was saying the US would grow by 1.9 per cent in 2008. Then in January of this year it downed its estimate again, this time predicting 1.5 per cent growth. Yesterday it published its latest projections, and now reckons the US will expand by just 0.5 per cent this year. Incidentally, it also predicts growth of 0.6 per cent in 2009 – or in other words, only a very tiny pick up.
As for the UK, the IMF has now pencilled in growth of 1.6 per cent both this year and next, so while it is not predicting a UK recession, it is suggesting the UK will not bounce back next year as the Government believes.
“The US economy will tip into a mild recession in 2008 as the result of mutually reinforcing cycles in the housing and financial markets, before starting a modest recovery in 2009 as balance sheet problems in financial institutions are slowly resolved,” said the IMF in its report.
More worryingly, it added, “The overall balance of risks to the short-term global growth outlook remains tilted to the downside. The IMF staff now sees a 25 per cent chance that global growth will drop to 3 per cent or less in 2008 and 2009—equivalent to a global recession. The greatest risk comes from the still-unfolding events in financial markets, particularly the potential for deep losses on structured credits related to the US subprime mortgage market and other sectors to seriously impair financial system balance sheets and cause the current credit squeeze to mutate into a full-blown credit crunch.”
Alistair Darling leapt to his own defence yesterday, citing a ”strong economy that had proved remarkably resilient” and, speaking on the Today programme, said, “The IMF has down-rated every country’s growth forecast in the light of what’s been happening in the world economy. However, they have lowered their expectations in relation to us by less than other countries.”
Mr Darling says he still believes the UK will expand by between 1.75 per cent and 2.25 per cent in 2008, and between 2.25 per cent to 2.75 per cent in 2009.
If you believe that the UK economy is lagging 12 to 24 months behind the US, then it may be worth comparing the defensive position taken up by our silver chancellor yesterday with the Bernanke line of last year. In March 2007 we quoted him as saying, “The economy appears likely to continue to expand at a moderate pace over the coming quarters,” then added, “at this juncture … the impact on the broader economy and financial markets of the problems in the sub-prime markets seems likely to be contained.”
It is easy to be wise in hindsight. You could argue it is very easy to criticise the IMF and Messrs Benrnanke and Darling for underestimating the full consequences of the credit crunch. But there was no shortage of economists and publications – this among them, who warned things were more serious than the official estimates suggested.
So we would like to state now, at a point when no one could say we are being wise in hindsight, not only do we think Mr Darling is grossly optimistic with his projections for the UK, we think the IMF is too.
The UK is more dependent on its property market than the US, and should house prices continue to fall over the next few months, the reverberations for the rest of the economy will be serious, not for a while, but in 2009.
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