The IMF would do us a great service if it stopped pretending that it can accurately forecast the world economic outlook.
Earlier this month, Boeing did something that the IMF might consider doing. It recognized that, especially at these times of heightened economic policy uncertainty, forecasting something as complicated as the American economy is a fool’s errand. Instead of providing shareholders with one set of earnings guidance, it did so with two sets: one on the assumption that the U.S. economy would avoid an economic recession and the other on the assumption that the U.S. economy would succumb to a recession.
If Boeing had good reason to be modest about its forecasting ability, the IMF should be so in spades. It would be an understatement to say that the IMF’s forecasting record makes our weather forecasters look good.
One indication of the IMF’s poor forecasting record is the extent to which it has had to revise its earlier forecasts. Another is its failure to forecast major economic events. As illustrations, it was caught totally flatfooted by the onset of the 2008–09 recession, it totally failed to anticipate the 2010 eurozone debt crisis, and more recently it failed to warn us of the world’s 2021 inflationary surge.
The IMF has also not covered itself in glory in forecasting the economic trajectory of Greece and Argentina, the two countries that have had the largest IMF financial support programs on record. In Greece, the IMF failed to anticipate that its conditional lending program would contribute to a Greek economic depression between 2010 and 2015 that had echoes of the 1930s Great Depression. Meanwhile, more recently in Argentina, despite a $40 billion lending program, the IMF failed to predict that Argentina would once again return to 200 percent inflation and default yet again on its debt.
Undaunted by its past poor forecasting record, twice a year the IMF presents us with a detailed World Economic Outlook. In its latest economic forecast, presented ahead of its spring meeting, the IMF now tells us that, while the U.S. and world economies will slow down this year, no recession is expected. Indeed, its baseline forecast is that the U.S. economy will grow by 1.7 percent this year and the world economy by 2.8 percent.
One reason to take the IMF’s forecast with a large pinch of salt is that no one has any idea of what the United States’ economic policy stance will be. One day we have a 25 percent import tariff on Canada and Mexico, and the next day there is a to be one-month pause. One day Smoot-Hawley-like reciprocal import tariffs are imposed on some 60 countries, and the next week there is a 90-day pause before those tariffs come into effect while trade deals are to be negotiated. One day there is a 145 percent tariff on all Chinese imports with no exceptions, the next day there is a temporary carve-out for electronic imports. One day government workers are fired, the next day they are rehired when it was realized how essential they were.
We can also have no idea how the trade war between the United States and China, the world’s two biggest economies, will play out or what retaliation might be taken by America’s main trade partners. Similarly, we have no idea what the collateral damage will be to the world financial system of the recent meltdown of the U.S. equity market, the U.S. Treasury bond market, and the U.S. dollar. Can we be sure at a time when there are abrupt changes in financial market prices and when the U.S. appears to be losing its safe-haven status that there is not another Long-Term Capital Management type of problem waiting to occur?
Yet another reason to doubt the worth of the IMF’s forecasts is that we live in a world of unusually heightened geopolitical uncertainty that could have an important bearing on the world economy. Both the Middle East conflict and the ongoing Russia-Ukraine war could have major implications for international oil prices. At the same time, the world’s supply of computer chips could be seriously disrupted if China were to blockade Taiwan. As if that were not sufficient reason for concern, Trump is now talking of taking action to acquire Greenland and to regain control of the Panama Canal.
All of this suggests that, especially in today’s world of heightened policy uncertainty and geopolitical risks, trying to forecast where the world economy is headed is a foolish endeavor. What would be of potentially great benefit for both economic policymakers and market participants alike, however, is a careful analysis of the likely economic outcomes of alternative economic policy and geopolitical scenarios. The IMF would do us a great service if it stopped pretending that it can accurately forecast the world economic outlook and focused its efforts instead on providing us well-reasoned alternative-scenario analysis.