IMF sees global slowdown

Koehler: still room "not to be overly pessimistic"

The world economy is heading for a sharp slowdown thanks to decelerating US economic growth, according to the International Monetary Fund (IMF).

In the wake of the 11 September attacks on the US, the IMF said it had to downgrade the more rosy expectations it announced a month ago.

There is no real precedent for this situation, which makes forecasting based on previous experience look something like trying to read the tea leaves

Horst Koehler
IMF managing director

Then, it said US growth would be 2.2% in 2002, while the global economy would expand about 3.5%.

But the IMF has had to change its mind.

Now, the world is forecast to grow at just 2.4%, according to the IMF managing director Horst Koehler speaking at a news conference in Washington DC ahead of the IMF meeting in Ottawa this weekend.

The technical definition of a recession is growth lower than 2.5%, even though for some countries, including the UK for most of the last 20 years, average growth has been even lower than that.

Tea leaves

But Mr Koehler insisted that was not the case.

IMF growth predictions (previous predictions)

World economy
2001: 2.4% (2.6%)
2002: 2.4% (3.5%)

United States
2001: 1.1% (1.3%)
2002: 0.7% (2.2%)

European Union
2001: 1.7% (1.8%)
2002: 1.4% (2.2%)

Japan
2001: -0.9% (-0.5%)
2002: -1.3% (+0.2%)

Developing countries
2001: 4.0% (4.3%)
2002: 4.4% (5.3%)

Africa
2001: 3.5% (3.8%)
2002: 3.6% (4.4%)

Middle East
2001: 1.7% (2.3%)
2002: 4% (4.8%)

Asia
2001: 5.6% (5.8%)
2002: 5.6% (6.2%)

"We do not think that this is a recession," he said. "The outcome fo the slowdown will be less severe than the recessions in 1991 and in the early 80s."

Even so, Mr Koehler admitted that today's figures are something of a shot in the dark.

"We have to recognise that we face an extraordinary degree of uncertainty in the aftermath of the 11 September attacks," he said.

"There is no real precedent for this situation, which makes forecasting based on previous experience look something like trying to read the tea leaves."

Mr Koehler said the key reason for the downgrade was the poorer than expected performance of the US.

According to IMF figures, the world's largest economy will grow just 1.1% this year and 0.7% in 2002.

US Treasury Secretary Paul O'Neill, however, said the IMF was too pessimistic. "I bet [IMF Managing Director Horst Koehler] dinner that he¿s off by a lot," Mr O'Neill said.

Japan, the number two, is mired in recession, with the IMF predicting a contraction of 0.9% this year and 1.3% in the next.

That means that the two main motors of the global economy are losing traction simultaneously.

On top of that European Union growth is now seen at 1.7% this year and 1.4% in 2002, down from 18.% and 2.2%.

Room for hope

Mr Koehler was at pains to stress that there was still room for some hope, with falling energy prices and the "major" potential for technology-linked productivity gains meaning a rapid rebound is possible.

"We have reason not to be overly pessimistic," he said.

"What is needed now is to build confidence through sober analysis and sound policies, while making sure that we are prepared to deal with a worse outcome if that proves necessary."

The US should push on with its stimulus package, he said, although he called for a clearer picture of what it meant in practice, and suggested that, with inflation under control in Europe, the European Central Bank has room for a fourth rate cut this year.

The meeting in Ottawa, he added, would discuss what regulatory and legal frameworks are necessary to choke off funding for terrorists.