News Column

Analysis Economic forecasting? It's a smug game

July 25, 2014

Larry Elliott

Yet again the International Monetary Fund has been obliged to revise up its forecast for UK growth, this year and next. Only 15 months after it warned George Osborne that he would be "playing with fire" if he failed to ease up on his austerity programme, the IMF is predicting growth for Britain of 3.2% in 2014, comfortably the highest for any of the G7 countries. The recovery has taken much longer than Osborne expected and required more than five years of ultra-low interest rates.

As Ed Balls rightly notes, Britain is only just returning to its pre-recession levels of output and it will take several more years for living standards to return to where they were in early 2008. But with an election less than a year away, the chancellor has every reason for feeling just a little bit smug.

The fund could end up even more embarrassed if it is wrong in its assessment of the state of the global economy and the global financial system. Here, it is at loggerheads with the Bank for International Settlements (BIS) in Basle, which has warned that there is the danger of excessive risk taking in financial markets caused by a prolonged period of low interest rates and unconventional monetary policy.

The BIS is worried by the high level of asset prices and the low level of volatility in markets, which sit oddly with a sluggish global recovery. Not a problem, according to Olivier Blanchard, the IMF's chief economist. The fund does not see a systemic threat to financial stability, partly because the commercial banks have cleaned up their balance sheets and partly because central banks have a new range of macro-prudential tools that they can use to tackle rising asset prices without the need to resort immediately to raising interest rates.

In one sense, Blanchard's concerns that monetary policy could be tightened prematurely are justified by its downbeat growth projections for the US and the eurozone. But the BIS is entirely right to point out the risks that another bout of financial turbulence could be around the corner. Central bankers don't know nearly as much about the possible side-effects of a prolonged period of abnormally loose monetary policy as they think they do. Moreover, the form guide favours the BIS. Back in 2006, when the IMF was convinced financial stability was here to stay, it was the central banks' central bank in Switzerland that warned that the Great Moderation was not all it was cracked up to be. Larry Elliott

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Source: Guardian (UK)

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