Should You Believe the IMF's Optimism?

Yesterday, the International Monetary Fund released a new update to their World Economic Outlook that was rather chipper in tone:

World growth is projected at about 4½ percent in 2010 and 4¼ percent in 2011. Relative to the April 2010 World Economic Outlook (WEO), this represents an upward revision of about ½ percentage point in 2010, reflecting stronger activity during the first half of the year. The forecast for 2011 is unchanged. At the same time, downside risks have risen sharply amid renewed financial turbulence. In this context, the new forecasts hinge on implementation of policies to rebuild confidence and stability, particularly in the euro area.

The figure above shows their forecasts for global growth in the world economy (blue), along with the emerging economies (orange) and advanced economies (red).  Looks pretty good.

That doesn't sound too plausible to me - with a massive global deleveraging cycle just getting under way, government stimulative efforts of last year winding down, and political and sovereign credit issues likely to limit further stimulus, my gut feel is that we'll be lucky to avoid another contraction next year.

But who am I to question the IMF?  As we all have been recently warned, economics is hard and blogger's opinions on it are worthless.  Presumably, however, the IMF employs first rate economists and their forecasts should therefore be reliable.

Wanting to check up on this, I went back through the archives of past WEO reports, looking at what the IMF said as the great recession developed.  This is what they thought in September 2006 (by when it was reasonably clear to those of us who believed in bubbles that the housing bubble in the US was bursting):

Since global growth did not in fact slow down much in 2007, this wasn't too bad - and they were warning of possible risks ahead, to their credit.

By October 2007, this was their view:

This isn't so good - growth in 2008 slowed down massively, and they did not foresee it - what actually happened was outside their 90% confidence interval.

By October 2008, with a massive global financial crisis in full-flower (Lehman bankruptcy in September 2008 remember), governments running around like chickens with no heads to prop up the banks and avoid a complete global collapse, the IMF could only bring themselves to project a slowdown to 3% world growth in 2009:

Even their 90% confidence lower bound did not allow for an actual contraction in the world economy.  They did acknowledge that things were slowing down, but that was about it.

By January 2009 (three months later, and around what would later turn out to be the trough of the global economy), they were willing to credit a much sharper global slowdown, but not yet an actual contraction:

By April 2009, they were finally willing to credit the actual global contraction that was underway:

In short, the IMF completely failed to foresee that a massive global financial crisis was likely to lead to a global recession.  Their 'forecasts' were a lagging indicator of what was happening.  (I have argued previously that this kind of thing is inherent in the nature of economics as a science).

Anyway, you might want to take their optimism now with a pinch of salt.