The IMF’s World Economic Outlook Update says that the rate of the recovery from the worldwide recession has accelerated though nearly all the comments in the document are qualified. Agencies such as the Federal Reserve to the World Bank have trouble when they forecast the future. Maybe things will get better, and perhaps they won’t.
At the heart of the WEO is the comment, “Global output is projected to expand by 4½ percent in 2011, an upward revision of about ¼ percentage point relative to the October 2010 World Economic Outlook. This reflects stronger-than-expected activity in the second half of 2010 as well as new policy initiatives in the United States that will boost activity this year.” America, once the boat anchor which held the worldwide recovery back is now the center of an improvement of the recovery. The Federal Reserve and federal stimulus packages have worked. The IMF even upgraded its projection for 2011 US GDP growth from 2.3% to 3.0%. Some additional credit for the better forecast goes to the extension of tax cuts and unemployment benefits, the IMF says.
The optimism about the prospects of a global and US recovery are riddled with cautions. “The most urgent requirements for robust recovery are comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances and to repair and reform financial systems in advanced economies more generally.” The debt problems of both Europe and the US may undermine almost all the IMF’s forecasts. The other enemy to the recovery which is lurking is inflation. Recent rises in the prices of agricultural commodities and crude oil have already begun to drive up the cost of goods around the world. Those increases will need to be passed along to consumers. Profit margins for many companies will suffer otherwise. Consumer spending cannot rise when the costs of consumer products are rapidly rising.
The IMF says the solution to nearly every problem it mentions in its new report is government policy. That is not true. Government policy has always been limited in its ability to combat international capital markets investors who take advantage of the debt of weak nations. There in no miracle in regulation, and it can often be flawed which has been the case in a number of decisions made during the recession and credit crisis.
The IMF report is not unlike the forecasts of the US budget by the White House. They differ from those of the CBO, those made by think tanks, and those created by many members of Congress. Some of the projections may be right. All of them can be wrong.
The IMF might as well save its time and effort. It cannot see around corners.
Douglas A. McIntyre
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