Won't get fooled again: IMF warning shows it's learned from past errors | Larry Elliott
Fund failed to foresee 2007 financial crisis, but this time around, it is determined not to miss signs of trouble in global economy
The International Monetary Fund’s World Economic Outlook (WEO) runs to almost 300 pages, but it could be summed up by the title of the song with which the Who always brought their gigs to an end: Won’t Get Fooled Again.
Like many other forecasters, the fund got carried away as the global economy posted its four strongest years of growth since the early 1970s. Only in retrospect did the IMF twig that the rapid expansion was the result of reckless financial speculation, and admit that it had been guilty of groupthink.
This time, the message is clear. This is not a case of see the new IMF, same as the old IMF. The warning has gone out loud, clear and early: be careful, because the long-awaited upswing in the global economy may not be for real.
The fund’s concern is that wage growth and inflation have remained weak, despite a prolonged period of ultra-low interest rates and the use of quantitative easing (QE), the money-creation process used by the world’s leading central banks in an attempt to stimulate activity.
Asset prices have risen sharply as a result of this stimulus. But the IMF fears that amid the euphoria, financial markets are ignoring the risks, just as they did in the buildup to the crisis in 2007.
What’s more, central banks and finance ministries have used up much of their ammunition in the past decade. There is little or no scope to cut interest rates, QE has long since been subject to the law of diminishing returns, and governments are running much bigger budget deficits.
The IMF’s more measured approach also extends to Brexit, where it has abandoned the line repeated in the run-up to the 2016 EU referendum that a vote to leave would result in instant economic armageddon.
To be sure, since the last WEO in April, the IMF has cut its growth forecast for the UK from 2% to 1.7%, but still reckons the outlook is better than it thought a year ago. At that stage, the IMF was pencilling in growth of 1.1% for Britain this year.
The fund’s public statements on Brexit reflect the change in the government’s own approach. Before the referendum, George Osborne was delighted when the IMF’s managing director, Christine Lagarde, issued her dire warnings about imminent economic meltdown. Indeed, the stronger the language, the more the then chancellor liked it.
The IMF’s current view is that the economic risks of Brexit will be minimised if the UK remains an open economy and has trading arrangements with the EU that largely mirror current ones. That also happens to be the view of Osborne’s successor, Philip Hammond, who could do without a blood-curdling assessment from the fund at this juncture.