|Projections||Diff between Apr-08 and Jul-08|
The growth projections have been revised marginally but inflation has been revised upwards majorly.
Simon Johnson, Chief Economist explains the reasons for growth revisions:
QUESTIONER: So, compared to your April forecast, both the growth and the inflation are higher. I just wondered if you could break down in a bit more detail why you think inflation is going to be higher than you did in April and why growth is ever so slightly higher too.
MR. JOHNSON: Sure. Let me start with the change in our view on growth. That’s relatively straightforward.
The effects of the financial disruptions which started last summer are working their way through the U.S. economy and other advanced industrial economies but somewhat more gradually than we anticipated. So, in terms of actual performance in the first quarter, there was good news. We were surprised on the upside, as you might say, for the U.S. and for Europe. But we think the second quarter is going to be weaker in Europe, and we think the third and fourth quarters are going to be weaker in the United States. So it’s taking some time to work its way through. That’s our forecast for 2008. Our forecast for 2009 is virtually unchanged. So it’s an issue of timing.
On inflation, I think that the main point there is oil prices. When we made our forecast and when we locked in our forecast and presented it back in April, oil prices were substantially lower than they are today….. When we made this forecast, we had to take into account substantially higher oil prices, which has a significant inflationary impact, affecting headline inflation in advanced economies, although not yet, as I said, feeding through into core inflation in those economies, but that’s a key thing to watch.
In emerging markets, as you know, headline and core inflation were much more similar because the consumption basket has a lot of fuel in it. It also has a lot of food, and the fuel prices are feeding into food prices. So the food price increase was already evident at the time of the Spring World Economic Outlook, and we talked about it at that time, but it has continued. Food prices have not come down very much in general. So that continues to feed through into inflation pressures. Both headline and core inflation in emerging markets and developing economies are elevated for that reason.
Fair enough. Though, what is worrying is that despite the outlook on inflation, IMF research note says central banks in developed economies may not need to do monetary tightening:
In many emerging economies, tighter monetary policy and greater fiscal restraint are required, combined in some cases with more flexible exchange rate management. In the major advanced economies, the case for monetary tightening is less compelling, given that inflation expectations and labor costs are projected to remain well anchored while growth weakens noticeably, but inflationary pressures need to be monitored carefully.
Also, IMF seems to be changing its views on fiscal stimulus. It has always told emerging markets not to use fiscal policy but has changed its stance when US used it:
QUESTIONER: You mentioned that the U.S. economic stimulus package had been well timed. Democrats in the House are calling for a second round of economic stimulus. (A) Do you have any advice for them and (B) what sorts of considerations do they need to keep in mind as they debate this?
MR. JOHNSON: Yes. Well, we don’t comment on pending legislation, as you can imagine. But I’m happy to talk about what went right with the last fiscal stimulus and what lessons we should learn from that, and that’s something which we will examining in the Fall World Economic Outlook. We will be looking at fiscal responses much more generally and look at lessons learned from the U.S. experience.
I think that the timing was really a key part of this stimulus. The problem with fiscal policy, of course, is it’s very hard to get the timing right. Even though this stimulus was done very quickly and the checks have arrived within six months really of the consensus formally that this was a necessary thing, that’s still a considerable lag. And, you don’t know what the economy is going to be like in six months. It’s very hard to call what will happen in the housing market. It’s very hard to know exactly how financial conditions will play out.
So we continue to regard fiscal stimulus as, obviously, a policy tool that can be helpful in many instances, but one that should be used with great caution and only when you feel that for some very compelling reason that monetary policy cannot, by itself, handle the problems. And, that’s speaking about the U.S.
If you look more generally around the world, there’s less of a case in many instances, less of a case within industrialized countries, for using a discretionary stimulus because they have stronger automatic stabilizers. The U.S., because it has a relatively small government as a percent of GDP, has a stronger case for sometimes using discretionary stimulus. In other countries, we tend to prefer that they rely on automatic stabilizers, certainly at this point.