US recession raises global fears

Koehler says the US economy will pick up in 2002

The US economy is suffering a "mild recession", according to the managing director of the International Monetary Fund (IMF), Horst Koehler.

The United States is now expected to experience a mild recession in the second half of 2001, followed by a recovery which strengthens through 2002

Horst Koehler
IMF

The Fund's forecast is the first official acknowledgement of what financial analysts and business executives have feared for months.

According to the IMF's predictions, the world's largest economy will shrink during the last six months of 2001.

"The United States is now expected to experience a mild recession in the second half of 2001, followed by a recovery which strengthens through 2002," Mr Koehler said at a Group of 20 nations meeting in Ottawa, Canada.

Technically, recession occurs if economic growth is negative during two consecutive quarters of a year.

Weakness ahead

Mr Koehler's prediction of an economic recovery next year means a US recession would be short-lived.

The fundamental strengths of the US economy; our strong macroeconomic foundations and our dynamic and flexible labour and capital markets, remain intact

Paul O'Neill
US treasury secretary

But that forecast comes with a health warning, since Mr Koehler also predicted that US economic growth will remain weak, if not negative, in 2002.

The terror attacks of 11 September led the IMF to revise its previous estimates about US growth to just 0.7% for 2002, down from its 2.2% October forecast.

If the IMF is right, the US will grow at its slowest rate since its last recession during the early 1990s.

Rejection

The US treasury secretary Paul O'Neill rejected the IMF's prediction as too negative, though he acknowledged that "it's a difficult quarter".

Mr Brown, seen here with Mr Koehler, is keen to avoid the US economic downturn spreading to the UK

However, the "fundamental strengths of the US economy; our strong macroeconomic foundations and our dynamic and flexible labour and capital markets, remain intact," Mr O'Neill said.

But Mr O'Neill agreed with the IMF's call for the US economic stimulus package to be pushed through quickly to enable confidence to recover.

World recession looms

The IMF's gloomy predictions for the US economy, taken along with its fears that Japan's recession will get worse, have led the Fund to slash its growth forecast for the world economy to 2.4% both for this year and next year.

The Fund's increased pessimism is dramatic, not least since many economists would deem it a world recession if the global economy grew by less than 2.5%.

In October, the IMF issued predictions that suggested the world economy would narrowly avoid recession.

At the time, it s predictions, which were based on statistics from before 11 September, suggested that the global economy would expand by 2.6% in 2001 and 3.5% in 2002.

But despite the increasingly gloomy predictions, few analysts predict that a world recession, if it hits, would be as severe as the last down-turn in the US in the early 1990s.