It’s the Denominator, Stupid!

This weekend’s news was the downgrade of the UK by Moody’s. Chancellor Osborne took this as a sign that austerity should be strengthened even more, probably because he had little choice (never put all your eggs in one basket…). And yet, if only somebody in Downing Street bothered going through the text, they would have read this:

The key interrelated drivers of today’s action are:
1. The continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which Moody’s now expects will extend into the second half of the decade;
2. The challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation programme, which will now extend well into the next parliament;
3. And, as a consequence of the UK’s high and rising debt burden, a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016.

Thus, Moody’s analysts clearly state the direction of causality:

IMF Schyzophrenia

I had already noticed that the IMF at times looks like Jekyll and Hide. But not to this point. Last time I cited a simple working paper. This time we are talking about the most important document produced by the IMF. Here are some excerpts from the October  IMF World Economic Outlook, released on Monday:

The Strange Case of Dr IMF and Mr Troika

With Greece desperately trying to obtain more time to carry on its fiscal consolidation plan, it is interesting to read a recent IMF working paper on “Successful Austerity in the United States, Europe and Japan”. The study tries to assess how fiscal consolidation and the growth rate affect each other, in expansions and in contractions. I copied and pasted (from their page 7; I just suppressed a couple of technical points) the main results of the paper:

Standard & Poor’s Joins the Herd

Standard and Poor’s decision to downgrade a large number of EU countries, on Friday, was widely expected; and, as I write, markets barely reacted. This is not surprising, as the downgrade had already been embedded in market behaviours.

There are of course notable political consequences, for example in what concerns the French presidential race.  But from an economist perspective, this is really not a turning point.

There is nevertheless a remarkable news, that went almost unnoticed.