IMF predicts more growth, but is it the right kind of growth?

The chances are that by now you’re already well aware of the gist of the International Monetary Fund’s latest update to their economic forecasts. As we revealed on Sky News yesterday, the Fund is raising its forecast for UK economic growth this year from 1.9% to 2.4% – the biggest upgrade of any major economy.

It’s raising its forecast for world economic growth as well, though by far less: it’s 0.1 percentage points higher than in October, at 3.7%. The US is also slated to grow at a faster rate than previously expected – 2.8%, compared with the 2.6% forecast last time around.


The news is not uniformly positive, however – there are cuts in the forecast for Russian and Brazilian growth, and although China’s growth forecast is notched up slightly, it is nonetheless poised to be at its lowest rate since the mid-1990s.

And while many will look at the IMF upgrade and exhale a large sigh of relief, the numbers are by no means compatible with a full-blown recovery. In fact, the Fund itself points out that, for the most part, the recent improvement in GDP numbers – the key metric it bases its forecasts on – are down not to a genuine bounce-back in spending, but to something else. As it puts it, in advanced economies, “much of the upward surprise in growth is due to higher inventory demand.”

Inventories are a rather bizarre element of national accounting – essentially they measure the work and products companies have made, but not sold. It’s the stuff they have warehoused away until there’s more demand. The problem is that a big reliance on inventories often means that today’s growth may not be sustained all the way into the future (after all, those big stockpiles mean companies may not have to produce as much in the coming quarters).

This graphic from the OECD shows the reliance in Q3 2013 on inventories/stockbuilding for higher growth
This graphic from the OECD shows the reliance in Q3 2013 on inventories/stockbuilding for higher growth

Now, on the one hand, set against the scale of the recession and crisis faced both in the developed and developing world, this question of whether we are now witnessing the “right kind of growth” might seem like a minor one. But the worry is that the world economy (especially the UK and US) are still reliant on the massive monetary stimulus provided by quantitative easing.

As Olivier Blanchard, the chief economist of the Fund, put it today: “as the recovery takes hold in advanced economies, a main challenge will be to normalize monetary policy.” This will imply big movements in markets in the coming years as investors become accustomed to the new world where markets are no longer being artificially propped up by central banks. This, in turn, holds some risk for developing economies, which are reliant on those capital flows for much of their growth.

But the more profound concern is that despite the monetary reservoir of cash which has been poured into major economies, many consumers are still reluctant to spend. Those high inventory numbers are a little worrying in that respect. There seem to be two alternative extremes going on right now: in countries like Britain people are willing to go out and spend, but only using their saved cash or by borrowing (because of those low interest rates caused by QE). Meanwhile in other areas – Europe in particular – there still seems to be a profound reluctance to spend.

A real rebound may well be on the cards in the coming months, but the IMF is worried we are still yet to see the full-blooded recovery that often follows a recession.