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Risks high, but IMF sees global growth

By SHIHOKO GOTO, UPI Senior Business Correspondent   |   Sept. 25, 2002 at 1:21 PM   |   Comments

WASHINGTON, Sept. 25 (UPI) -- The world economy is likely to go on expanding in spite of considerable downside risks continuing to pressure growth, the International Monetary Fund said Wednesday.

In its semi-annual World Economic Outlook report, the IMF projected total world gross domestic product growth rate expanding by 2.8 percent in 2002 from a year ago, up from 2.2 percent posted in 2001. For 2003, the IMF pegs global GDP at 3.7 percent.

Leading the way into recovery would be the United States, and the IMF foresees U.S. GDP rising to 2.2 percent, up from 0.3 percent in 2001. Meanwhile, it projects the rate rising to 2.6 percent in 2003. For industrialized nations overall, the IMF pegs growth at 1.4 percent this year, rising to 2.3 percent the following year, having averaged 0.6 percent in 2001.

Nevertheless, there are a number of major issues that could derail such any recovery, the IMF's chief economist Kenneth Rogoff warned at a news conference in releasing the latest projections.

"Slower growth in Japan and Germany is a concern ... as are turmoil in emerging markets, and heightened tensions in the Middle East," Rogoff said.

Moreover, the IMF stated that the Federal Reserve could do more to keep the U.S. economic engine revving, namely by cutting interest rates still further.

"In view of the heightened uncertainties surrounding the outlook, the Federal Reserve has room to wait to withdraw stimulus until the recovery is more clearly established, and if the incoming data were to weaken further, additional interest rate cuts would need to be considered," the IMF said.

The Fed's policymakers voted Tuesday to keep the key federal funds target rate unchanged at 1.75 percent, where it has held steady since last December. But two of the 12 members had shown rare dissent, by voting for the central bank to cut rates further Tuesday, rather than keeping them steady.

The IMF also warned that prevailing weakness in the stock market will weigh down U.S. as well as global growth.

"Clearly, the recent sharp decline in equity markets will have a significant impact on demand looking forward, particularly in 2003, although this will be partly offset by the recent fall in long-run interest rates and the depreciation of the dollar," it reported.

The World Economic Outlook was released as the IMF and the World Bank prepare for its joint annual meetings this weekend, which will be attended by finance ministers and central bankers from more than 180 member countries. The meetings were cancelled last year after the terrorist attacks on New York and Washington.

But while the impact of the terrorist attacks on the world economy appears to have been relatively contained from a solely macroeconomic perspective, there are a number of key concerns that could potentially derail the IMF's upbeat forecast.

One major concern for the international community is undoubtedly the effect an attack on Iraq would have on the world economy, particularly as it would adversely affect relations between the world's richest nations and the Middle East. While Rogoff was quick to acknowledge that a rise in oil prices was most likely as a result of a war, he declined to make any further specific comments about an event that has not yet occurred.

But Rogoff did caution that continued economic weakness in Japan and Germany, the world's second- and third-largest economies, respectively, remained a considerable source of anxiety moving forward, even though there have been some signs of recovery in both countries.

Japan needs to increase its output, which "cannot be achieved by macroeconomic policies alone," but also fundamental structural changes, particularly in the banking sector, the IMF stated. Still, the agency said that business investment is likely to pick up later in the year, even though deflation remaining at around 1 percent would "magnify real debt burdens."

The agency projects Japan's GDP to continue sliding, shrinking by 0.5 percent in 2002 after contracting by 0.3 percent the previous year. But it anticipates growth by 1.1 percent in 2003. As for Germany, the IMF forecast GDP growth dipping slightly to 0.5 percent, down from 0.6 percent in 2001, but growing to 2.0 percent in 2003.

The bright spot in the global economy remains steady productivity gains, particularly in the longer-term, Rogoff said. He added that productivity in light of technological advancements is likely to increase steadily not only in industrialized countries, but also in developing nations.

© 2002 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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