by Ralph Schoellhammer
Wednesday, 24
May 2023

Why should we trust the IMF’s economic forecasts?

Its prediction of a UK recession this year has now been revised
by Ralph Schoellhammer
IMF Managing Director Kristalina Georgieva meets UK Chancellor Jeremy Hunt on Tuesday. Credit: Getty

Economic forecasting isn’t an easy gig these days. While economic analysis might seem a purely empirical task that reveals objective information, the truth is that every forecast will inevitably influence the outcome of the next. Economic actors will take estimates of the macroeconomic picture into account and adapt their future behaviour. In other words, every forecast runs the risk of becoming a self-fulfilling prophecy and, depending on its nature, the forecasters want to either avoid or encourage this self-fulfilment.

In the case of Germany, for example, there have been several revisions since December 2022, given that every original forecast turned out to be overly optimistic and in need of a downward adjustment. One should keep this in mind before celebrating yesterday’s news that, according to the IMF, the UK economy could grow 0.4% in 2023, instead of contracting 0.3% as was originally assumed. The fact that Bloomberg covered the story as “Britain’s Economic Guessing Game” is no coincidence, and just because it is good news for a change does not mean this forecast is more reliable than the ones which preceded it. 

Like what you’re reading? Get the free UnHerd daily email

Already registered? Sign in

First of all, 0.4% growth is anaemic at best, so the often ecstatic reaction to such meagre numbers reveals how low expectations for the economy truly are. What’s more, the finding that growth is stronger than in Germany — which has turned itself once again into the sick man of Europe — is ultimately meaningless. 

German underperformance is no indicator of British excellence, especially considering that Germany is the UK’s second most important trading partner. Economic downturns are contagious, and the idea that the UK will prosper while Europe’s largest economy drags the rest of the pack into recession is highly unlikely, regardless of what the revised IMF forecast says. 

Things look equally bleak on the other side of the Atlantic, and a majority of US economists believe that the United States will enter a recession in the second half of this year — although it remains to be seen how deep and prolonged the downturn will be. But with both the US and Germany facing an economic contraction, one should be sceptical about the UK being the exception which escapes a general negative trend. This is also reflected in polls measuring views in the business world, which remains quite cautious about the larger macroeconomic picture and where confidence is only returning very slowly.

One key element of the more positive IMF prediction is an anticipated prolonged decline in energy prices. This assumption coincides with a warning yesterday by Qatar’s energy minister that the “worst is yet to come” for Europe in the energy sector, and that it was only due to an unusually warm winter that a catastrophe had been delayed. The IMF report also barely touches on the ongoing war in Ukraine, another geopolitical factor that makes all economic forecasts inherently unreliable as things stand.

A cautious observer would assume that the IMF wanted to increase economic confidence through a more upbeat outlook, which is understandable. Yet if experience is any guide, the next revision won’t be far away.

Join the discussion

To join the discussion in the comments, become a paid subscriber.

Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.

Notify of
Most Voted
Newest Oldest
Inline Feedbacks
View all comments
David Jory
David Jory
4 days ago

The IMF likes centrally planned economies. It has been wrong many times about Britain and always seems to forecast lower then the real growth. These forecasts then put pressure on governments to follow the ‘rules’ as espoused by the IMF.
It seems to do the opposite for Germany.
Eventually reality wins, but it is quite a struggle.

Mark epperson
Mark epperson
4 days ago

I agree, but on a wider scale, why should we trust, at the present time, any government forecast, report, statement, or a talking head, or hairdo briefing?

Milton Gibbon
Milton Gibbon
3 days ago
Reply to  Mark epperson

It’s not that we (ordinary people) need to trust them but that investors and banks currently do. As explained in the article the forecasts have their own internal logic where if more growth is forecast investors are more likely to invest in the economy, or be able to justify an investment to their bosses.

Even if each missed growth figure only accounts for 0.1% and it is likely to be a lot more especially when negative growth is upgraded to positive it makes a big difference over time due to the percentage rise in the economy. One mistake in the other direction would be reasonable as it makes with other countries.

Last edited 3 days ago by Tom Ware
Nicky Samengo-Turner
Nicky Samengo-Turner
4 days ago

It all depends on the statistics, compilation and definition of recession: far too macro.