The storm that threatens the global economy has been raging ever since the toxic assets crisis started five long years ago. That crisis has not ended, or receded, but transformed into multiple crises: from fiscal deficit and sovereign debt to poverty, unemployment and the rise in food and fuel prices. Nevertheless, the International Monetary Fund (IMF) had to get its face wet to take note of the storm and rain.
And now it is radically changing its previous forecasts, of just three months ago, with an incredible levity as if it were advising on a cooking recipe – and this without offering the slightest apology. It barely attempts as rationale that the data are now clearer and partly blames the earthquake in Japan.
Let it be borne in mind that the Fund is an international public organization, and that up to the last penny it spends, lends or squanders is taxpayers’ money, from rich and poor countries, which end up paying millions as wages to its officials to deal justly with promoting worldwide financial stability and to alert about possible unbalances.
Among its most recent forecasts, in July, the then brand-new Managing Director, Christine Lagarde, said:
Greece has made ‘some progress’ regarding its economic reforms and the IMF foresees the country will return to a positive economic growth by next year.
The IMF told Greece in 2010 that it would solve its situation if it followed the Fund’s advice, and imposed a severe adjustment program in exchange of €110.000 million, which would go straight to debt payment and not to recovery plans.
Presently, a second similar bailout is being studied to avoid a Greek default, and the country has just announced a second adjustment plan to convince its European partners to release a share of the funds agreed upon last year, because by October it will not even be able to pay salaries. A general strike is taking place and hundreds of thousands of unemployed wander through the streets of Athens.
No less surprising are the successive declarations of Olivier Blanchard, Economic Advisor and Director of the Studies Department of the IMF, who wrote in a blog titled Global Recovery Strengthens, Tensions Heighten[i], posted on April 11, 2011:
“The world economic recovery[ii] is gaining strength, but it remains unbalanced.
“Three numbers tell the story. We expect the world economy to grow at about 4.5 percent a year in both 2011 and 2012, but with advanced economies growing at only 2.5 percent, while emerging and developing economies grow at a much higher 6.5 percent.
“On the good news side. Earlier fears of a double dip – which we did not share – have not materialized.The main worry was that, in advanced economies, after an initial recovery driven by the inventory cycle and fiscal stimulus, growth would fizzle.
“Fears have turned to commodity prices. Commodity prices have increased more than expected, reflecting a combination of strong demand growth and a number of supply shocks. These increases conjure the specter of 1970s style stagflation, but they appear unlikely to derail the recovery.”
The IMF publication World Economic Outlook, posted on the web on April 11, said[iii]:
“The global economic recovery is gaining strength, with world growth projected at about 4½ percent in both 2011 and 2012, but unemployment remains high, and risks of overheating are building in emerging market economies, the International Monetary Fund (IMF) said in its latest forecast.”
“Given the improvement in financial markets, buoyant activity in many emerging and developing economies, and growing confidence in advanced economies, economic prospects for 2011–12 are good,” Blanchard wrote what the IMF had said in its April 2011 World Economic Outlook.
“For both 2011 and 2012, we expect the growth rate to be 4.5 percent, fairly high growth rate,” added IMF Chief Economist Blanchard.
Two months later, on June 17, he wrote under the headline Global Growth Hits a Soft Patch[iv], in IMF’s global economy forum online:
“Despite a mild slowdown, the global economic recovery continues but the road to health will be a long one. Downside risks, both old and new, are increasing.
In other words, the global recovery continues. But the road to health is still a long one. And surely there is no time to relax.”
On September 20, at the World Economic Outlook presentation press conference[v], Blanchard said the global economy was entering the danger zone, and admitted forecast mistakes:
“As the Managing Director said . . . , the global economy has entered a dangerous new phase. The recovery has weakened considerably, and downside risks have increased sharply. Strong policies are needed both to improve the outlook and to reduce the risks.”
In Foreword to the World Economic Outlook, Blanchard writes[vi]:
“Relative to our previous World Economic Outlook last April, the economic recovery has become much more uncertain. The world economy suffers from the confluence of two adverse developments. The first is a much slower recovery in advanced economies since the beginning of the year, a development we largely failed to perceive as it was happening.
“Growth, which had been strong in 2010, decreased in 2011. This slowdown did not initially cause too much worry. We had forecast some slowdown, due to the end of the inventory cycle and fiscal consolidation. One-time events, from the Earthquake and tsunami in Japan to shocks to the supply of oil, offered plausible explanations for a further slowdown. And the initial U.S. data understated the size of the slowdown itself. Now that the numbers are in, it is clear that more was going on.”
The question arises: What data was being evaluated? Europe has been suffering an almost irresolvable crisis for months, but Blanchard and his cohorts apparently did not even “perceive” that something was amiss – until a few days ago when they realized that reality was going against all of their predictions.
The forecast mistakes would be forgiven if they came from a teacher, a lawyer or a surgeon, but no pardon for well-paid “experts”, whose job is to supervise the world economy and alert when things are going wrong.
What makes things worse is that those experts are not inclined to admit their mistakes and apologize – not to speak of offering their resignation – as if their blunders were inconsequential, and just a minor oversight in a cooking recipe.
By Raul de Sagastizabal
Translated by Daniel Cisneros