April 9, 2019 / 1:36 PM / 3 months ago

Breakingviews - IMF plays Cassandra to the global economy

International Monetary Fund Managing Director Christine Lagarde delivers a speech at the U.S. Chamber of Commerce in Washington, U.S., April 2, 2019. REUTERS/Kevin Lamarque

LONDON (Reuters Breakingviews) - Good advice is useless unless it is followed. That may be the problem for the International Monetary Fund, whose latest economic prescriptions are sound but either hard to put into practice or almost certain to be ignored.

The international lender headed by Christine Lagarde on Tuesday cut its 2019 global growth forecast to 3.3 percent, down from 3.6 percent in 2018 and the 3.5 percent that it had forecast as recently as January. A slowdown in advanced economies accounts for more than two-thirds of the projected deceleration from last year, with particularly big markdowns for Germany and Italy. And that’s if all goes well.

The IMF is counting on nuanced policy stimulus in China, financial market sentiment holding up, the dissipation of some recent drags on euro zone growth, and a stabilisation in a few big emerging market economies such as Argentina and Turkey. Even if that all works out, trade tensions between the United States and China could flare anew. Or problems may erupt in Europe, say if Britain exits the European Union in a disorderly way, or Italian bond yields rise too high for too long, compounding pressure on Italian banks.

Little wonder that the IMF’s chief economist, Gita Gopinath, stresses the need to avoid policy mistakes. Nor is there any dearth of good advice. The IMF urges China to clamp down further on credit-fuelled investment without hitting the brakes too hard, and with the proviso that fiscal stimulus may be needed if growth slows sharply. In the United States, Federal Reserve Chairman Jerome Powell gets kudos for taking a patient approach to raising interest rates but President Donald Trump’s administration is told to focus on raising revenue as a share of GDP, after following policies that have added to already-high U.S. public debt. Germany, meanwhile, is named as one of the countries with room to stimulate domestic demand.

Some of these prescriptions may be tricky to pull off, as in the case of China. Others will probably go unheeded, as in the case of the United States or Germany because they don’t gel with governments’ priorities. Trump will want the U.S. economy to be in good health before the 2020 presidential elections while German Chancellor Angela Merkel’s government values fiscal discipline too much to let rip on spending. As Brexit negotiations have shown, political considerations usually take precedence over what’s economically rational or best for regional and global growth. Like Cassandra, the IMF may have to content itself with being right, if unheeded.


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