IMF cautious on global growth

The US economy is improving

US economic growth is expected to improve this year and next, but not enough to give a strong push to the world economy, the International Monetary Fund (IMF) has said.

The IMF's annual progress report, the World Economic Outlook, gave the thumbs up to hopes that the US recovery may be gaining pace.

It predicted global economic growth would be 3.2% in 2003, and 4.1% for 2004, the same forecasts it made in April.

"There is now good cause to be reasonably optimistic that the global economy is finally digging itself out of a very deep hole," IMF chief economist Kenneth Rogoff said on BBC World Business Report.

"But it is certainly no time for complacency."

The IMF took a positive view of prospects for some of the world's poorer countries in Africa and Asia.

IMF growth projections for 2003 Eurozone: 0.5% UK: 1.7% US: 2.6% S. America: 3.6% Africa: 3.7% Mideast: 5.1% Asia: 6.4%

But it warned that near-zero growth in Germany would seriously jeopardise the prospects for the whole eurozone.

And it said that the collapse of the Cancun trade talks was a "tragedy" that would eventually lead to slower growth and more poverty in developing countries.

"Without stronger trade, global growth will eventually slow significantly and global poverty will rise," Mr Rogoff said.

Conflict hurts

Growth in Africa would "pick up significantly in 2004", it said.

However, it said Africa's prospects depended upon better weather and fewer wars.

"Such an out-turn, however, depends critically on more favourable weather conditions and a substantial reduction in the incidence of conflict and unrest," the IMF report said.

The report was released ahead of the IMF and World Bank annual meeting, which starts next week in the Middle East state of Dubai.

Of the US, the IMF said it "continues to project a renewed recovery in the second half of 2003 and 2004, at a somewhat stronger pace than earlier expected."

US Risks

But it warned that the US economy faced risks from its huge government deficit and a possible collapse in house prices.

"One has to be quite concerned about what will happen eventually when the twin deficits - fiscal and current account - are reined in, as eventually they must be," said Mr Rogoff, who is returning to Harvard after the IMF meeting concludes.

Without stronger trade, global growth will eventually slow significantly and global poverty will rise Kenneth Rogoff, IMF chief economist

He also warned of a further fall in the value of the US dollar, which would affect currencies around the world.

"Some day the U.S. current account deficit ... has to unwind and when it does there will be sharp drop in the dollar," Mr Rogoff said.

The US budget deficit is expected to reach $500bn in the next fiscal year as the cost of the Iraq war and Bush administration's tax cuts take effect.

Nevertheless, the IMF sees US economic growth of nearly 4% in 2004, enough to begin to reduce unemployment and give Mr Bush a boost in the forthcoming election.

European weakness

But the IMF warns that there is still considerable weakness in the remainder of the world's major economies.

Although a modest recovery has begun in Japan, with growth now projected at 2% this year and 1.4% next year, Mr Rogoff said it was "premature" to say the Japanese economy was "out of the woods."

And the growth prospects for Europe have deteriorated further, with the IMF projecting zero growth for Germany in 2003, and only 1.5% growth in 2004.

The IMF warns that the German financial sector is still fragile, and that there could be a period of "mildly declining prices."

And it has reduced the forecast for the whole of the eurozone to just 0.5% this year, and 1.9% next year.

But it says that the Eastern European countries which are expected to join the EU in 2004, including Poland, Hungary and the Czech Republic, could show improved growth prospects in the run-up to accession.

Mixed fortunes

The IMF is projecting strong growth in the emerging markets of Asia.

It expects East Asia to be the world's fastest growing region, led by exporters like South Korea and Taiwan.

Emerging Asia is expected to growth by 5.9% this year and 6.2% next year, while China is set to grow by 7.5%, slightly below the official forecast of 8.0% as a result of the Sars virus.

But growth could slow in the Middle East, which is still highly dependent on oil revenue.

The IMF says Middle East states must work hard to increase jobs, especially as oil analysts expect the price of crude to weaken.

In a report last week, the IMF also warned that Middle East states must improve their own performance, tackling corruption and nepotism, in order to increase economic growth.