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Last Updated: Wednesday, 9 April, 2003, 16:51 GMT 17:51 UK
IMF warns of weak world economy

By Steve Schifferes
BBC News Online at the IMF/World Bank spring meeting in Washington

The IMF's semi-annual world economic forecast says the world faces another year of sub-normal growth.

The International Monetary Fund (IMF) has sharply revised downwards its forecast for economic growth for 2003, and says that it is unlikely that the "sputtering global growth will suddenly lunge ahead into an immediate strong recovery."

It is forecasting world growth of 3.2% this year, and 4.1% next year, down 0.5% in 2003 from previous forecasts.

World economic growth
USA 2003: 2.2%
2004: 3.6%
Eurozone 2003: 1.1%
2004: 2.3%
Japan 2003: 0.8%
2004: 1.0%
UK 2003: 2%
2004: 2.5%
source: World Economic Forecast

Kenneth Rogoff, the IMF's chief economist, told the BBC that there had been some "collateral damage" from the war, which damaged consumer and business confidence, and that the fall-out from the collapse of stock prices was still affecting the world economy.

Longer-term effects

Mr Rogoff also warned that there were some longer-term risks to the world economy from the more uncertain world security situation.

He said that average world growth could be reduced by around 0.25% because of the greater insurance costs and the reduction in global trade, which was putting "sand in the wheels of globalisation."

The worries about world security since September 11 could also affect business investment and reduce migration, he argued.

And the greater military spending could have reduced the "peace dividend" that allowed countries to reduce their budget deficits and spend more on social programmes.

US budget worries

Mr Rogoff also expressed worries about the US budget deficit which was "unsustainable" in the medium term.

He said that, although he was "sympathetic" to the idea of eliminating the double taxation of dividends, the Bush administration plan for a $726bn tax cut was "awkwardly timed", given the "open-ended commitment" to spending on security and reconstruction in Iraq and possibly elsewhere.

He said that any tax cuts should be accompanied by measures to address the long-term problem of the social security system, which might mean raising the retirement age.

And he called on the Federal Reserve to adopt a more open and transparent approach to setting interest rates in the "post-Greenspan" era, although he pulled up short from advocating a fixed inflation target for the US.

The IMF projects a fall in US growth to 2.2% in 2003, before recovering to 3.6% in 2004 - not enough to cut the unemployment rate before the 2004 election.

Weak Europe and Japan

The IMF has even more worries about Europe, where eurozone growth has been revised down by more than half to just 1.1% in 2003, before recovering to just 2.3% in 2004.

And Mr Rogoff was critical of the European Central Bank, saying it should cut interest rates and adopt an explicit, and symmetrical inflation target of 2.5%, higher than the current target of 0% to 2%.

He said that in Germany, structural reform was needed to reform labour and product markets, which could add several percentage points to growth.

And the IMF argues that stronger measures are needed to tackle deflation in Japan, coupled with more openness by the central bank.

In contrast, Mr Rogoff praised the Bank of England for its transparancy and effectiveness in managing inflation.

And he said the UK was putting in a credible economic performance, and may benefit from an "echo boom" in productivity due to investment in technology.

Rebuilding Iraq

The IMF said that it stood ready to play a role in the rebuilding of Iraq if it were asked to do so by the international community.

Mr Rogoff said that the IMF had a lot of experience in post-conflict situations, for example in the Balkans and Afghanistan.

The most important problem would be to rebuild trust in the currency, which would be likely to collapse in the wake of war.

As well as helping the central bank, the IMF could also help develop a sound tax system and measurement tools to help manage the economy.

The BBC's Andrew Walker
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