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EU Referendum: IMF it's not over

2016-04-15 04:53:23

Called in to Wednesday's BBC2 Daily Politics Show to address amongst other things the IMF's forecast downgrade of UK growth – delivered on Tuesday in its 2016 World Economic Outlook (WEO) - Owen Paterson was one of a number speedily putting the lid on the IMF's intervention into the referendum debate. But the game is not over. There's more to come.

Every year, the IMF produces what is known as an Article IV review of the economy of every country, including, of course, the United Kingdom. This year is no exception. Consultation on the current report was completed in February.

But, at the press conference on the release of the WEO in Washington three days ago, IMF Research Department Director Maurice Obstfeld dropped a bombshell. His organisation was preparing more detailed estimates on the effect of Brexit, for inclusion in the Article IV review. And now we learn from managing director Christine Lagarde that there will be a special chapter on the impact of Brexit in the review, to be published next month.

This time just round, on balance, I think we won the argument. That was despite the BBC running it as its lead item on all the evening television news bulletins the previous day. But that was just the warm-up. The next time, this will be a country-specific report, full of detail, and it will doubtless get full frontal treatment by the media once again.

Just how this will play out we can never really tell. The sound and fury of a media storm does not necessarily translate into voter sentiment, although we do get limited clues from the polls.

The latest on that score is YouGov and, to my mind, the really crucial question is the one that asks: "taking everything into account, what do you think would be the SAFER course of action – remaining in the European Union or leaving the European Union?" This was completed the same day as the WEO release.

Here, even without the IMF, the response is not that encouraging. We get 42 percent who believe that remaining in the EU is the safer option, against 35 percent who think that leaving is the safer option. Indicating how much there is to play for though, we see the "don't knows" at 23 percent.

Further (albeit small) comfort can be taken from the February results, where the remains played out at a point more, while the leavers were four points lower and the "don't knows" were three points higher. On the face of it, we're eroding the remains and the "don't knows", which has got to be good news.

To my mind, if we can reverse the percentages, putting the leavers ahead on the safety stakes, we will win. I'd make this "safety" figure the most important metric, and measure our success (or otherwise) by it.

And it is precisely that to which the IMF intervention was playing. This organisation had tucked away a short comment in the foreword to its 230-page WEO report, the single sentence that: "In the United Kingdom, the planned June referendum on European Union membership has already created uncertainty for investors; a 'Brexit' could do severe regional and global damage by disrupting established trading relationships".

Further into the report, we got a whole section to the issue, with the warning that "A British exit from the European Union could pose major challenges for both the United Kingdom and the rest of Europe". It continued:
Negotiations on post-exit arrangements would likely be protracted, resulting in an extended period of heightened uncertainty that could weigh heavily on confidence and investment, all the while increasing financial market volatility. A UK exit from Europe's single market would also likely disrupt and reduce mutual trade and financial flows, curtailing key benefits from economic cooperation and integration, such as those resulting from economies of scale and efficient specialization.
What this was all about, though – evoking the "shock-horror" headlines - is that the IMF was downgrading UK growth prospects for 2016 by a whole 0.3 percent. Thus, the net effect of Brexit was to be a drop of the expected rate of growth from 2.2 to 1.9 percent, and for one year only. The 2017 forecast was unchanged.

How much more we're going to get from the IMF next month is anyone's guess, but at least we have a tried and tested strategy. The way Paterson handled is typical of how others tackled it. The IMF, he said, has track record of getting things "heroically wrong". That is the answer to the forthcoming review: to head it off at the pass, with an appreciation of how flawed the work of the IMF so often is.

The IMF, for instance, is the very same organisation that, in January 2015 cut 0.3 percent from its forecast on global growth - the same fall predicted for the UK in 2016- settling on 3.5 percent. Yet the actual out-turn was 3.1 percent, down a further four points, due to "unexpected weakness" in late 2015. That is something the IMF didn't see it coming. 

In fact, so inaccurate is IMF forecasting that one commentator suggested taxpayers' money could be saved by replacing  its staff with dart-throwing chimps.This was after its 2013 forecast for world growth came in at 4.1 percent when the S&P 500 had been at 1,400. When it issued its revised outlook of 2.9 percent,  the S&P 500 had been just a whisker off its all time high.

In 2014, the Finanical Times was assessing its record in predicting the 2009 recession. Its verdict was: "An astonishing record – of complete failure". To be fair, this remark was not confined to the IMF. Nevertheless, none other than IMF economist Prakash Loungani found there was little to choose between the IMF and the World Bank, and private-sector forecasters. Their records were all "terrible". Loungani wrote: "The record of failure to predict recessions is virtually unblemished".

By 2104, Loungani, with a colleague, Hites Ahir, had returned to the topic in the wake of the economic crisis. The record of failure remained "impressive", he said. Of 77 countries under consideration, 49 had been in recession in 2009. Economists had not predicted a single one. 

This also works the other way. In June 2014, Christine Lagarde had to issue a "grovelling apology" to Chancellor George Osborne, after slamming austerity plans in 2013, and downgraded UK growth to just 0.7 percent. The outcome was 1.7 percent growth. Lagarde admitted to being "surprised" by the effects of the policies adopted by the UK government.

Everywhere you go, you are going to find complaints of IMF inadequacies. In November 2015, the Jamaican Gleaner noted how the IMF had got its surplus targets wrong for the management of the economy, setting them so high as to cause quite unnecessary economic pain.

A very similar complaint was heard from Greek Prime Minister Alexis Tsipras, who recently said that the IMF was insisting on adopting wrong policies in Greece, even after admitting its mistakes in the two previous bailouts. "In Greece wrong policies were applied and it is a paradox that those who recognised that there were wrong policies, admitting their mistake, insist on applying the [same] mistake", he said.

On the effects of the economic slowdown in China, the IMF has been wildly wrong, claiming the 2016 growth would likely drop below the current prediction of 3.5 percent and have a profound effect on the global economy, sufficient to trigger a recession in the United States. Yet other economic experts argue the fears are overblown. The impact on the US and Europe is expected to be minimal.

Most interestingly of all, the IMF is blamed for being partially responsible for the extent of the Ebola crisis. It forced over-rigid budget cuts in West Africa which weakened public health services so much that, when the disease emerged, there was no longer the capacity to deal with it.

This is the effect of an organisation which, next month, is going to do some serious shroud-waving about Brexit. And if its general incompetence were not enough, it is going to base much of its doomsday scenario on "a UK exit from Europe's single market".

As with so many others, it fails to make the distinction between membership of the EU and participation in the Single Market, which depend only on the EEA Agreement, accessible to Efta States outside the EU. The easiest way, therefore, to defuse the IMF is to come up with an exit plan that keeps us in the EEA.

And the need for a plan is precisely what Asa Bennett of the Telegaph is pointing out that we need. With one, we are fireproof. Without one, we are even prey to the incompetent IMF.