IMF cuts global growth forecasts, BIS report revisited

The International Monetary Fund is expected to lower its global growth forecasts. From Bloomberg:

International Monetary Fund Managing Director Christine Lagarde signaled a cut in the institution’s global growth forecasts, saying investment is still weak and that risks remain in the U.S. even as its rebound accelerates.

“The global economy is gathering speed, though the pace may be a bit less than we previously predicted because the growth potential is lower and investment” spending remains lackluster, Lagarde told the Cercle des Economistes conference in Aix-en-Provence, France.

... The IMF is preparing to update its economic forecasts this month after predicting April 8 that the global economy will expand 3.6 percent this year and 3.9 percent in 2015.

Growth in the U.S., the world’s largest economy, is set to accelerate in coming months and Asia’s emerging market economies will avoid a hard landing, though the European recovery is still not as strong as it should be, Lagarde said.

The previous Sunday, it had been another international financial body, the Bank for International Settlements, that made the news when its annual report had warned of early signs of trouble for financial systems.

Gavyn Davies summarises the view of the BIS as well as that of central banks with regards to monetary policy and its impact on financial stability:

The BIS views the crash as the culmination of successive economic cycles during which the central banks adopted an asymmetric policy stance, easing monetary policy substantially during downturns, while tightening only modestly during recoveries...

In contrast, the mainstream central bank view denies that monetary policy has been biased towards accommodation over the long term. Ms Yellen’s speech claims that higher interest rates in the mid 2000s would have done little to prevent the housing and financial bubble from developing. She certainly admits that mistakes were made, but they were in the regulatory sphere...

Davies states that “my own view is usually fairly close to the Fed/Yellen mainstream”. But he reminds us:

The BIS was right about the dangers of risky financial behaviour prior to the crash. That caused the greatest demand shock for a century. Keynesians, including the Chair of the Federal Reserve, should be more ready to recognise that the same could happen again.