April 09, 2003

The IMF Gets Gloomier

The IMF gets gloomier: expected year-2003 growth in Japan down to 0.5%, in Europe to 1.1%, in the U.S. to 2.3%. That should see unemployment rise by 0.5% in the U.S., and by somewhat more in Europe. In a way, the IMF's revisions shouldn't change my view: it's only summarizing news that I already knew, after all.

Economist.com: ...The IMF is now expecting slower growth in the world's biggest economy than it was six months ago, and, significantly, than last year. The Fund nevertheless expects America to lead the global upturn, and argues that the world is now too reliant on American growth. A greater sense of urgency is needed to reduce dependence on America, says the Fund in its list of policy prescriptions.

Easier said than done, of course. If the outlook for America is subdued, it is dismal in most parts of Europe and Japan. The IMF is clearly very worried by the poor economic performance of the euro area--its latest forecast for growth this year is less than half that produced in September. Germany is of particular concern: as the Fund points out, 2003 will be the third consecutive year that Europe?s largest economy has grown at a rate of less than 1%. There is not much sign of any improvement, either. Although--unlike some economists--the IMF forecasters do not believe there is much risk of global deflation, they do think that of all the industrial countries, Germany remains most vulnerable to falling prices after Japan.

Japan, of course, is now almost a global economic pariah. Deflation there is well-entrenched and the authorities have so far failed to make any headway in stabilising prices, let alone restoring some measure of inflation. The IMF predicts that prices in Japan will continue to fall at least through to the end of next year (the extent of the IMF's projections). The Fund--like almost every other commentator on Japan--wants to see the Bank of Japan make an explicit public commitment to ending deflation. It also wants to see firm action to tackle structural problems in the banking and corporate sectors.

One reason why the IMF is concerned that the world remains too dependent on America for its economic momentum is that there is relatively little room for manoeuvre when policymakers need to respond to outside shocks, especially in Europe and Japan. The Fund clearly wants lower interest rates in the euro area in any event. At a news conference on April 9th, the Fund's chief economist, Kenneth Rogoff, also said that the ECB should consider replacing the current 2% inflation ceiling with a central inflation target of perhaps 2.5%, so as to make it easier to relax monetary policy.

But the fiscal position in both Europe and Japan makes it hard for policymakers to provide much additional stimulus. The IMF does not explicitly criticise the euro-area's notorious stability and growth pact; indeed, it sees merit in European governments sorting out their fiscal mess by aiming for balanced budgets over the medium term. But it wants the so-called automatic stabilisers--higher spending and lower tax revenues--to take full effect during the current slowdown. So governments should let the short-term budget deficit go above the 3% limit if need be--not a suggestion that will win the IMF many friends at the European Central Bank.

Heavy reliance on borrowing in the past has pushed public debt up sharply in many economies, just as the prospect of ageing populations means that pensions, health-care and benefit programmes need to be reformed, to prevent them surging out of control. Yet there is little sign of either Japan or the euro area acknowledging the dangers if such change is postponed.

America may be the economy on which everyone relies but its policy shortcomings do not escape comment from the IMF. The Fund is particularly concerned about the Bush administration's planned fiscal stimulus. The large tax cuts envisaged could, says the IMF, be pro-cyclical--in other words, they could give the economy a boost just as it is anyway starting to pick up speed. The risk there is that inflationary pressures could build up. But what really troubles the IMF--and it is not alone in this--is the size of the budget deficits that would result from big tax cuts. The underlying change in the balance between tax revenues and government spending, which would remain even after the economy had recovered, is bigger than in any downturn in the past 40 years, according to the IMF.

Posted by DeLong at April 9, 2003 12:00 PM | TrackBack


In the Bad=Good world of Bushnomics, the fact that an international organization with some French people in it criticizes their policies will be taken as a seal of approval.

Posted by: P O'Neill on April 9, 2003 03:08 PM

The IMF has every right to be worried. Bush inherited a surplus and has run the economy into the sewer. The times called for a fiscal stimlus- money to the states, money to people who would spend it and an effort to reduce the overcapacity in the tech sector.

Bush responded with an ideologically insane looting of our treasury, handing out tax rebates to wealthy crooks like his good buddy Ken Lay of Enron and other wealthy campaign contributors that hold average Americans in contempt. Those tax cuts are being used to buy government issued bonds to cover the massive budget deficits of the Bush administration, not to train the workforce or build the infrastructure or to invest in business that will provide new jobs. The Bush fiscal policy has been to send welfare checks to the welfare queens like Ken Lay that depend on government legislation to fleece the American public. The middle class is getting screwed by this administration. Ken Lay will send his millions off to the Caymans and live in exile overseas. The rest of us working stiffs will have to foot the bill. The Bush administration is the most corrupt since Harding and Teapot Dome. I take that back. They have Harding beat by a long shot.

Bush thinks that if he gives enough of our tax dollars to his buddies, that they will buy the next election for him. It is time for America to wake up and stop the robbery. This corrupt administration has got to go.

Posted by: bakho on April 9, 2003 09:57 PM


Recently the IMF has been warning of problems problems problms in Brazil. My sense is that Brazil is going to do just fine. The IMF makes forecasts that are politically laden and suspect.

Remember the Mexican crisis, the Asian crisis, remember Argentina?

My guess is that the IMF is too optimistic about world growth just now. We could easily have growth below the 2.5% level which indicates a world recession.

Posted by: jd on April 10, 2003 11:21 AM

Hmm. Mexico was a real crisis that was averted through the skilled intervention of the US under Robert Rubin. The Asian crisis is still ongoing. Last time I checked, Argentina was a basket case.

We will see about Brazil. They practically go from one crisis to the next. There are a lot of economies that are not doing all that well right now including the US.

Posted by: bakho on April 10, 2003 05:35 PM

Okay, dim non-economists' question: why is growth under 2.5% a recession? Where does "2.5" come from? And is that growth per capita or what?

Posted by: clew on April 10, 2003 06:34 PM

Okay, dim non-economists' question: why is growth under 2.5% a recession? Where does "2.5" come from? And is that growth per capita or what?

I am not an economist, but I reckon that:
- a 2.5% of GDP growth if less than inflation plus population growth.
- The GDP is for the whole country.


Posted by: Antoni Jaume on April 11, 2003 12:43 AM

Growth under 2.5% is not a recession, However, it may feel like one. Because the labor pool in the US is expanding, the economy must expand to keep pace with the labor pool AND increase in productivity or unemployment will go up. A growth rate of over 3% is needed.

The other point to keep in mind is that economic figures are constantly revised as new data becomes available. It takes 3 years or so to get the final numbers. The early numbers are estimates.

Posted by: bakho on April 11, 2003 04:01 PM

So a country with a constant population would neither be nor feel recessionary even if its economy grew at exactly 0%?

We don't seem to be getting off the planet; I'm mildly curious whether a pleasant, stable solution is hypothetically possible.

Posted by: clew on April 11, 2003 08:04 PM

So a country with a constant population would neither be nor feel recessionary even if its economy grew at exactly 0%?

We don't seem to be getting off the planet; I'm mildly curious whether a pleasant, stable solution is hypothetically possible.

Posted by: clew on April 11, 2003 08:09 PM

Not quite. I think the 2.5% refers to the growth rate of real GDP (i.e., nominal GDP deflated by a chained price index). The reason 2.5% is important is that it offsets the rate of population growth plus the rate of capital stock depreciation. Still, according to the NBER definition 2.5% is not a recession, so someone needs to come up with a tighter classification methodology.

Posted by: andres on April 13, 2003 08:55 PM
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