(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

 

LONDON  - The International Monetary Fund is not the only forecaster to make dud economic predictions. But its tardiness in admitting where it made mistakes is pernicious for a body that gives economic advice to countries around the world and monitors risks to financial stability.

The Washington-based lender on Tuesday cut its global growth forecast for 2022 by half a percentage point to 4.4% and predicted inflation in advanced economies would be 3.9% in 2022, 1.6 percentage points higher than anticipated as recently as October. That’s partly because it slashed this year’s U.S. GDP forecast by more than one percentage point, to 4%, and expects higher inflation there.

The IMF was caught short on a few fronts. In the United States, it had previously overestimated the prospects of legislating President Joe Biden’s "Build Back Better" fiscal package, according to First Deputy Managing Director Gita Gopinath, until recently the fund’s chief economist. It was also surprised by continued supply-chain disruptions, and the speed at which the Federal Reserve is planning rate hikes.

The lender can be forgiven for being wrong on the first point: Politics is unpredictable. The other two misses are less pardonable, even though Gopinath had plenty of company in underestimating price pressures. There was a plethora of evidence over the course of last year that suggested inflation would be sticky, including what company executives were saying, shipping rates, and national survey data on inventories and delivery times.

Being so wrong for so long about inflation, and misjudging Fed Chair Jerome Powell’s response, is a worrying error. What happens to U.S. policy rates has knock-on effects for financial markets. That’s visible from recent steep stock market drops, and the rise in poorer countries’ borrowing costs.

It may be coincidence that the IMF’s change of heart on inflation and Fed policy came after Powell shifted his stance. And it’s pointless making wild predictions in the hope of being the outlier who will be proven right. But sane voices, including former IMF Chief Economist Olivier Blanchard, were presenting reasonable arguments nearly a year ago for why inflation might prove sticky. The IMF could have given more weight to these risks earlier. The lesson for the lender’s new chief economist, Pierre-Olivier Gourinchas, is that a good forecaster needn’t always get it right, but ought to admit mistakes quickly.

 

CONTEXT NEWS

- The International Monetary Fund on Jan. 25 cut its 2022 forecast for global growth to 4.4%, half a percentage point lower than it had expected in October. It predicted inflation in advanced economies would be 3.9% in 2022, 1.6 percentage points higher than it had anticipated in October.

- The downgrade to global growth predictions largely reflected markdowns in the United States and China, the two largest economies. The Washington-based lender slashed its 2022 GDP forecast for the United States by 1.2 percentage points to 4.0% and that for China by 0.8 percentage points to 4.8%.

- The U.S. downgrade reflected the lower chance of President Joe Biden’s "Build Back Better" spending package becoming law, tightening monetary policy and supply chain problems, Gita Gopinath, the IMF’s First Deputy Managing Director and until recently its chief economist, said in a blog.

- She attributed China’s downgrade in part to the real estate sector and weaker-than-expected private consumption.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by John Foley and Sharon Lam) ((For previous columns by the author, Reuters customers can click on PATTANAIK/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe | swaha.pattanaik@thomsonreuters.com; Reuters Messaging: swaha.pattanaik.thomsonreuters.com@reuters.net))