IMF oil price warning

The global economy is doing fine, but Prague's businesses fear protests against the IMF summit

By BBC economics correspondent Andrew Walker in Prague

The International Monetary Fund (IMF) has issued an optimistic forecast for the global economy, but warned that high oil prices could cut world-wide growth.

It is a fairly rosy outlook, with robust economic performance expected next year.

The IMF forecast is for world economic growth of 4.7% this year and 4.2% next year.

But when presenting the report at a news conference, the IMF's chief economist Michael Mussa warned that worldwide growth could easily be reduced by half a per cent next year if oil prices remained high.

The IMF presented its twice-yearly World Economic Outlook in the run-up to the annual meetings of the IMF and the World Bank which are held in Prague this year.

Euro intervention?

Global growth is driven in part by the continued strength of the United States economy, which is now enjoying its longest ever period of uninterrupted economic expansion.

Western Europe is also growing faster, and the IMF says that a recovery appears at last to be underway in Japan after a decade of stagnation.

However, Mr Mussa warned that the weakness of the euro against the dollar and the yen was beginning to pose a problem.

He argued that now might be the right time for a coordinated intervention to boost the single currency. This suggestion, however, was immediately rebuffed by a source in the German government.

"Michael Mussa should concentrate on his job instead of giving his advice to the European Central Bank," the source told a news briefing in Berlin.

Developing countries too are mostly growing robustly after the series of emerging markets crises that began with Asia in 1997.

Waiting for the US to slow down

There are two important elements in this forecast that we have heard from the IMF before and have turned out to be wide of the mark in the past.

One is that the remarkably fast growth in the US will slow down. The IMF has been saying for years that it must happen sooner or later. Still it hasn't.

This year the growth rate is likely to be more than 5% - it used to be thought that the sustainable rate for the US was about half that.

Next year, the IMF says it is likely to come down to a more modest figure.

Japan's hangover

And then there is Japan, still suffering from a very very long hangover after the party of the late 1980s - the so-called bubble economy.

Many times, the IMF has predicted a recovery.

There have been intermittent signs of renewed life, mostly driven by large public investment spending programmes.

But they have not lasted.

This time, the IMF forecast is cautious. There is a health warning about deficiencies in Japanese economic data, saying they must be interpreted cautiously.

Even so, the IMF concludes, it does appear that a modest and fragile recovery is underway. It will need more support from public sector investment.

And the down-side of all these government financed efforts to stimulate a recovery is a deterioration in the government's finances, a problem the IMF says Japan will have to face in due course.

Risks

The main thrust of the global forecast is decidedly upbeat. But the report does point out some risks to the outlook.

There are what it calls imbalances in the global economy.

The US has a record deficit in its trade with the rest of the world - strictly speaking in its current account.

Savings in American households are extremely low. Share prices remain high there and in some other countries. The major currencies are mis-aligned - exchange rates do not reflect economic performance, a concern particularly in relation to the persistent weakness of the euro.

There is a possibility of these imbalances unwinding in what the IMF calls a disorderly fashion - which means financial market turmoil and possibly a recession in some countries.

The cost of oil

And then there is a risk posed by high oil prices.

Some independent economists have warned that the tripling of crude oil prices since early last year could cause a recession.

The IMF stops short of saying that. But it does warn that higher oil prices would have a direct impact on inflation and global economic activity.