World economy stumbles, says IMF

By David Schepp BBC News Online North America business reporter in Washington

A scant six months ago, the International Monetary Fund (IMF) was scrambling to revise upward its estimates for worldwide economic growth.

IMF forecasts, 2003 GDP growth

World: 3.7%
(was 4%)

US: 2.6%
(was 3.4%)

UK: 2.4%
(was 2.8%)

Japan: 1.1%
(was 0.8%)

EU: 2.3%
(was 2.9%)

That followed an unexpected robust quarter of growth in the US - first pegged at about 6% for the first three months of the year - which led many to believe economic recession had abated.

In its most recent assessment of the world's economies, however, the IMF has ratcheted down many of its estimates for this year and most of its projections for 2003.

Despite the myriad revisions, the IMF's World Economic Outlook (WEO) still calls for the global economy to expand by 2.8% in 2002.

The international-finance organisation, however, has lowered its estimate for 2003, calling for worldwide growth of 3.7%, three-tenths less than what it called for last spring.

"Although our baseline is still for a global recovery, it's likely to be less strong than we earlier anticipated," said Kenneth Rogoff, director of economic research at the IMF.

Slower growth

The United States, the world's largest economy, is forecast by the IMF to grow by 2.2% this year and 2.6% the next.

While the revisions for this year's expansion has been reduced by only 0.1% from the IMF's previous prediction, 2003's rate of growth has been revised substantially lower - by nearly 1%.

Rogoff: Inflation remains a concern for world banks

Nevertheless, in speaking to reporters at IMF headquarters in Washington, Mr Rogoff noted strong gains in productivity in the US during the 1990s technology boom were real.

For the UK, the IMF is now calling for growth rates of 1.7% in 2002 and 2.4% in 2003, downward by 0.3% and 0.4%, respectively.

Among other advanced economies, predictions for economic growth in Germany, France and Italy have all been cut for both years.

Growth estimates for the European Union were revised downward, with the IMF now calling for member nations to grow by 1.1% this year and 2.3% the next.

Mr Rogoff expressed concern over the lack of growth in Europe, saying its nations have potential for growth that could be unlocked.

"Europe needs to decide whether it's going to be a locomotive in the world economy or a caboose," he said.

Japan woes

Japan was the only major economy in the report to emerge with upwardly revised growth estimates for both years.

But even as the IMF upped its estimates for Japan, Mr Rogoff noted this year its economy would contract by 0.5%.

"Japan appears to be emerging from its third recession in a decade," he said.

"However, there is no guarantee against another similarly bad decade absent a determined effort to address the nations core economic problems."

Less imbalance

Worries over growth have spooked markets this year

The IMF noted in the WEO that even as the global recovery continues "concern about the pace and sustainability of the recovery have risen significantly."

A weakened dollar, falling share prices on world markets and availability of financing for developing countries all contributed the IMF's downward revisions.

"The recovery is still expected to continue, but global growth in the second half of 2002 and in 2003 will be weaker than earlier expected," the IMF said, "and the risks to the outlook are primarily on the downside."

In the survey, released in advance of this week's meeting of the Group of Seven (G7) nations, the IMF said inflation remain generally subdued and advanced economies need to take that into account when fashioning fiscal policy.

"World inflation is projected at a modern-era low of 1.4% in 2002 for industrialised countries and 1.7% in 2003," Mr Rogoff said.

Taking into account technical factors, the levels were virtually the "moral equivalent" of zero inflation, he said.

However, in quoting American novelist Mark Twain, Mr Rogoff warned: "Rumours of the death of inflation are greatly exaggerated."

Watch out

The world's central banks need to remain vigilant to the possibility of a steady, slow increase in inflation over the coming years, he said.

Mr Koehler has called for increased aid and trade

For developing countries, the IMF predicted an average inflation rate of 6% in 2003.

While considerably higher than developed nations, the rate is still at historic lows, Mr Rogoff said.

Monetary easing may be necessary if data suggest the recovery is faltering, the IMF said.

In its publication, the IMF also noted the world needs to rely less on the US as an engine of economic growth and must create more balance among global economies.

Scandals take a toll

The IMF reiterated accounting scandals and concern over corporate profits have weakened equity, or stock, markets around the globe with "surprising synchronicity".

It blamed the depreciation of the American dollar against such currencies as the euro and the yen on reduced investment in the US along with growing anxiety over its rising deficit.

The report also noted substantial turbulence in emerging markets, particularly Latin America and Brazil where political instability has made investment there much less attractive.

Latin American stock markets remain volatile and the regions currencies have fallen sharply against the US dollar.

Brazil's recently announced aid package, however, has brightened prospects, the survey said, as have commitments among political candidates to pursue sound economic policies.

Costly impediments

The report noted the following conclusions:

• Among industrialised countries, the recovery in the US is now expected to be considerably weaker than earlier thought.
• The outlook for major developing nations has become increasingly diverse - especially among Latin American nations.
• In Africa, economic growth has held up surprisingly well, supported by improved economic policies and fewer conflicts, among other things.

The report also renewed its demand that Western nations boost their aid to developing nations - specifically those of Africa - and increase trade.

It is a call IMF Managing Director Horst Koehler has stressed in recent months, saying barriers imposed by industrialised nations result in substantial costs to developing nations.

It is a message he is expected to reiterate at this week's annual meetings of finance ministers in Washington.