China's Stimulus the IMF Forecast and Questions about France's G-20 Agenda

November 11, 2008 9:45 AM

Ten days before the opening of the G-20 heads-of-government meeting in Washington, the International Monetary Fund (IMF) issued a revised forecast for global growth, released last Thursday, that has been widely interpreted as merely confirming that the world economy is slowing down. (And fast—it is remarkable to knock nearly a percentage point off the global growth projection, just a month after the last forecast went final.) But the forecast can also be read as a reflection of the Fund's exhortation to fiscal expansion and, among some observers, as an indication of where some participants in the G-20 process may be headed.

For example, China's growth for 2009 is now projected at 8.5 percent, which struck me as too high when the forecast came out. Lucky for me that I dawdled in writing a critique, because China's fiscal stimulus, announced over the weekend, makes higher growth somewhat more plausible. The IMF is allowed, by its own rules, to include in the forecast fiscal (and other) policy moves that it knows to be in the offing, even if they have not yet been publicly announced. But it can't base the forecast on just probable or potential policy changes. If the IMF knew about China's package (as it almost surely did three days in advance), then this is built into the forecast.

So what else can we infer about imminent policy changes from the forecast, if we read it sort of backwards in this fashion? The thing that really struck me was what the forecast says about Europe, particularly France.

According to the forecast, headline growth in 2009 will be roughly the same in the United States and the eurozone (minus 0.8 versus minus 0.7). But the IMF's headline numbers are annual average growth rates, which are more affected by what happens at the beginning of a year (and actually, if you care about technicalities, by what happens at the end of the previous year). To see the Fund's view on economic dynamics within a year, you need to look at Q4 over Q4 projections, which are in the last two columns of their table 1.1.

These show that the United States will decline by 0.5 percent in 2009, but the eurozone will be flat ("–" in IMF table parlance means zero; I worked at the Fund for nearly four out of the past five years, but I could never get a straight answer on why they don't write the rather more obvious "0.0".) This says that the eurozone will recover faster than the United States, which—given the problems with European banks, consumer confidence, housing, and (most important) exposure to the ever-vulnerable East/Central Europe—is not so very obvious.

Furthermore, of the four major eurozone economies, the forecast shows declines for three: Germany, Spain, and Italy. (By the way, for Italy this Q4 on Q4 forecast for 2009 definitely looks too high). So who saves the day? According to the forecast, it is France, with growth of plus 0.2 percent Q4 on Q4. (Perhaps helped by Belgium and the Netherlands, but this is hard to believe, given the state of their banks.)

Such a positive statement about France is striking and more than a little at odds with where things are currently going (e.g., the IMF is projecting minus 0.4 percent for France in 2008, Q4 on Q4).

But the IMF forecast would make sense if France has tipped its fiscal hand, and is indicating something big and bold is in the works at the G-20 summit (the European rules against big budget deficits have, in case you didn't notice, now been effectively waived). Perhaps it is something that will be announced in the run-up to the G20 meeting? Could it be a fiscal package that will capture the imagination of the world, develop further the friendship with China, put pressure on the outgoing Bush administration, be warmly welcomed by newly elected Democrats, somewhat eclipse Gordon Brown, and (try to) make it clear that France has the credibility needed to dominate the international economic policy agenda?

This article was adapted from a posting on Mr. Johnson's blog, Baseline Scenario.