Hope springs eternal at the IMF. Despite an unusual constellation of imminent downside world economic risks, the IMF has raised its 2023 world economic forecast to 2.9 percent and is now predicting that both the United States and the world will avoid an economic recession this year. This is inducing the IMF to call for continued world monetary policy tightening. It is doing so even following last year’s unusually rapid pace of interest hikes and clear signs that inflation is declining rapidly from its June 2022 multi-decade high.
In assessing the IMF’s current economic forecast, it is well to recall that the IMF has not had a good track record in calling major world economic turning points. In 2008, the IMF was totally blindsided by the Lehman crisis that set off the world’s Great Economic Recession. In 2010, it was caught totally by surprise by the Greek debt crisis that triggered the Eurozone sovereign debt crisis that shook the world economy. In 2020, perhaps more excusably, the IMF was late in grasping the devastating world economic consequences of the Covid health crisis that led to the deepest post-war world economic recession. Then in 2021, it was still supporting budget stimulus at a time when the world was headed to multi-decade high inflation.
Now once again, the IMF is assuring us that there is unlikely to be a world economic recession and it is calling for continued monetary policy tightening even at a time when a constellation of major downside economic risks is in plain sight. The IMF also seems to be overlooking the likelihood that the triggering of any of those risks could precipitate another major world economic slump in a world drowning in debt and in a world where credit has been badly mis-priced.
Today, one major world economic risk that the IMF is managing to overlook is the impending US debt-ceiling crisis. Never mind that Treasury Secretary Janet Yellen is warning that extraordinary measures to avoid a US debt default will run out in June. Never mind too that a Republican-controlled House of Congress is making it clear that it will not agree to raising the debt ceiling without deep public spending cuts while President Biden keeps insisting that he is not open to negotiation.
In 2011, when there was last a major US debt ceiling showdown, world financial markets were shaken to the core. How much more so would that be the case today when the chance of an actual default in the world largest sovereign debt market is greater today than it was in 2011?
The chances that a new Bank of Japan governor will be forced after his appointment in April to abandon that country’s yield-curve control monetary policy is yet another major world economic risk to which the IMF is now turning a blind eye. This is the case even as that country’s inflation picks up to a multi-decade high and as the rest of the world is in a monetary policy tightening mode. Were the Bank of Japan to abandon its yield-curve control and deprive the world market of a major source of liquidity, tremors must be expected to reverberate through world financial markets.
One other major world economic risk that the IMF seems to be underplaying is the likely drag on world economic growth from a continued bursting of the Chinese property market bubble. This is all the more surprising considering that according to the IMF’s own estimates, China’s property and credit market bubble over the past decade was larger than that which preceded Japan’s lost economic decade in the 1990s and that preceding the 2006 US housing market bust.
All of this has to raise questions about the usefulness of the IMF making world economic forecasts rather than presenting us with alternative scenarios associated with various world economic risks. More importantly, it has to raise questions about the IMF’s policy recommendation that the world’s central banks should keep raising interest rates until they see clear signs that inflation is coming down sharply. Should any of the risks listed above trigger a meaningful world economic recession, inflation will be the last of the world’s economic problems.
Desmond Lachman is a senior fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
