On Wednesday the UK government budget was presented by Chancellor of the Exchequer Alistair Darling, and a pretty sorry tale he presented. But he has been hammered for being too optimistic because the IMF World Economic Outlook was published on British budget day. Its figures predict worse things than the UK government’s do and it is treated as authoritative. But why? Its new estimates reject the old ones it published with equal fanfare just three months ago.
Britain’s economic figures are dire: the highest unemployment since the early 1990s and jobs disappearing at unprecedented speed, the highest national debt ever, now projected to rise to 79 per cent of annual economic output in four years time, and a fall in economic output this year of 3.5 per cent, rebounding next year with growth of 1.5 per cent. On these last two figures, Alistair Darling has been hammered for being ridiculously optimistic. And just in case you doubted, along came the authoritative IMF with a forecast of a 4.1 per cent decline in output this year, with no rebound next year since output is expected to fall marginally by a further 0.4 per cent.
Oh heavens, how could the British government be so naive and get its forecasting so wrong? It’s important too, because if the UK shrinks by more and grows by less, then the national debt will be even higher and pushing towards 90 per cent of annual output in a few years.
Except, hang on, the IMF figure is also only a forecast so we don’t yet know if it’s right or wrong, and indeed when it last aired some forecasts three months ago it had UK output falling by 2.8 per cent in 2009 and rising by a tiny 0.2 per cent in 2010. Not good but visibly and significantly different.
Now, perhaps one is right, perhaps another is right, perhaps they are all wrong. But what happened in the last three months to get the IMF to change its mind about British economic performance?
Oh, now I see: it changed its mind about pretty much everybody’s economic performance. US economic output is now expected to fall by 3.8 per cent in 2009 and show zero growth in 2010, whereas only three months ago it was expected to fall by 1.6 per cent this year and rise by the same 1.6 per cent in 2010. In January, the IMF thought world output would grow 0.5 per cent this year and 3 per cent next, but now it thinks the world economy will be down 1.3 per cent this year then up by 1.9 in 2010.
And changing its mind and rejecting its previous estimates is nothing new for the IMF. Last November, it thought world output in 2009 would grow by what now looks like a relatively healthy 2.2 per cent (though that would actually still be pretty sick because it’s a figure that means the economy grows slower than population in most countries, thus the average person would be worse off).
And back to the UK economy: only half a year ago the IMF thought that in 2009 the fall in British output would be 1.3 per cent – a serious downturn, an economic catastrophe even, but not anything like as bad as we know it today.
Scanning the rest of the key tables, every other IMF projection changes just about as much, just about as often. So nothing is authoritative. A few points emerge out of this.
The first thing is that if you are going to use the IMF as the authoritative hammer to batter the Labour government over its tired head, you should acknowledge that the title of the new World Economic Outlook is ‘Crisis and Recovery’; whether the UK Treasury’s projection of 1.5 per cent growth in 2010 turns out to be accurate in detail or well wide of the mark, the basic pattern of recovery at the end of this year and growth next year, on which the budget’s assumptions are based, seems to be fairly widely accepted. Could be right could be wrong, but it’s not a fringe opinion, wacky, or just plain British spin, the product of delusions clung to by Labour alone.
The second point is that in the last three months of 2008, the economic output of the world’s advanced economies fell by an unprecedented 7.5 per cent – and the key word here is unprecedented.
The uncomfortable truth is that economic forecasters are discombobulated . Nobody knows what is going to happen because nobody has previously experienced what has just happened. But they keep on trotting out their projections, even if they have to change them every few months.
There was a time when UK Treasury projections of UK economic performance had a track record of being considerably more accurate than those from the OECD and IMF. That’s hardly surprising since the Treasury is concentrating on one economy while the international bodies are looking at many.
Today, however, there is no real reason to regard any one projection more highly than any other. No economic forecasting institution has established credibility for its estimates and projections in the present period. None of them foresaw an overall 7.5 per cent decline among the rich countries and until they establish a series of two or three accurate projections in a row it is hard to see why anybody should take any of them seriously.
But the third point is that we the people seem to crave authoritative information on our plight . In Britain the government is unpopular for many reasons and its projections are distrusted on general principle. So an alternative – and especially a worse – projection is quickly given credence. But it is not only negativism about the government that is in play here: it is also a basic need for certainty, for security, for an authority in which we can trust.
This is what ensures that there remains a market on the TV news for economic estimates and projections from that otherwise discredited species – the finance sector. And economists of all stripes and persuasions pander to this need for authoritative views of what is around the corner, stroking our insecurities all the time, ensuring they thrive, feeding the need even while, every few months in the IMF’s case, they frustrate it by contradicting what they said before.
The truth is that nobody yet knows – or, to be more precise, nobody has shown they know – what is happening or going to happen in this worldwide economic downturn. Its depth, breadth and length are equally unknown. Accordingly, policies for addressing it entail considerable risk and uncertainty.
I guess I am dreaming, but I cannot be alone in thinking it would be really helpful if our political discussions were mature enough to be able to accept uncertainty calmly and to start figuring out the best ways to narrow the terms of uncertainty and minimise the risks inherent in any given policy direction. Simply batting around ever changing economic forecasts doesn’t help anybody.
In July, instead of rejecting its previous estimates again, the IMF could try just shutting up. Now that might have a real impact on our economic debates.