You would hardly know it from a reading of the conclusions of the International Monetary Fund's World Economic Outlook, released Wednesday. Diplomacy and wishful thinking prevail. Only in dark asides does the Fund address the threats that lie ahead.
"The recovery is still expected to continue," the Fund writes, "The global slowdown in 2000-01 has proved to be more moderate than previous slowdowns."
The Fund predicts 2.8 percent world gross domestic product growth in 2002, a forecast unchanged from April, and 3.7 percent GDP growth in 2003, a rate which, Kenneth Rogoff, head of the Fund's Research Department told the media, is near the potential growth rate for the global economy and far above the 2.2 percent reached in 2001.
Thus, according to the Fund's forecasts the world economy will achieve this year and next an upswing from the marked slowdown suffered in 2001. The onward and upward track should continue, even if "the risks are primarily to the downside."
If this optimism were justified, it would indeed be hard to explain why stock markets have been falling, with the Dow Jones Industrial Average dropping this week to a 4-year low. The Fund's outlook for the world is usually a more sober one than those of investment banks, Rogoff suggested, because "we're not selling stocks." Yet, for the moment at least, the Fund would appear to be more optimistic than the market.
Timing may help to give the Fund some excuse. Its economists' careful calculations will have been elaborated and pored over for months. It is only in recent weeks that the talk of war has become too strong to be ignored and has therefore driven up the global oil price.
Many are now asking, what effect would a Gulf War have? To a degree they already have their answer. More expensive oil will dampen consumption in the United States and elsewhere in the West and make lower growth likely. Given that there was already well-justified doubt about the ability of the post-stock-market-bubble U.S. economy to recover, the risks of renewed recession have gone up. That is what the stock market is now weighing. Recession in the United States in 2003 is a long way from the 2.6 percent growth the Fund is forecasting.
The Fund's asides do address some of the dangers.
"The possibility of an abrupt and disruptive adjustment in the U.S. dollar remains a concern," the Fund writes, a concern more fully addressed in one of the interesting (and more scientific and frank) analytical essays contained in the Outlook. "The ratio of the current account balance to trade flows --perhaps the best measure of the degree of underling imbalance -- has risen to levels almost never seen in industrial countries in the postwar period."
The prime reason for this is the huge imbalance between the two giants of the world economy, the United States and Japan. "Japan is exporting 1.5 percent of world saving," the Fund writes, "and the United States is absorbing 6 percent."
Though the United States experienced a recession in 2001 its consumer spending has not yet suffered a contraction or even low growth, and demand for foreign capital to fund its trade and current account deficits has not diminished. This is why the dollar is vulnerable to a deep fall. If the capital inflows drop, the U.S. economy is likely to slow further -- spreading pain around the world.
The weaker dollar will make U.S. exports cheaper and imports more expensive. It would be more expensive, too, for Americans to travel outside the dollar area. The correction of the U.S. current account deficit via a weaker dollar would reduce US demand for exports and service from the rest of the world, spreading the slowdown in growth.
It is, to paraphrase Oliver Hardy, the United States that has got the world into this fine mess, through the euphoria of the stock market boom of the late 1990s which led to over-investment and over-consumption in the world's largest economy. Those bubbly distortions must be ironed out. Yet Europe and Japan are also to blame and, in a sense, still more to blame.
Japan, since the bursting of its 1980s bubble, has "taken a gradualist approach to reform," the IMF writes, "rather than taking decisive action." In other, less diplomatic words, Japan has failed to reform and its recent growth and growth prospects remain poor.
In Europe, meanwhile, the Fund highlights "the need to improve the euro area's growth potential," via "further structural reforms throughout the region."
In other words, Europe, too, has lagged on reform and has grown slowly, leaving the United States as the sole big engine to drive along the world economy.
That engine overdid it in the late 1990s, running on a now banned fuel called Bubbly, and requires major repairs.
The IMF won't tell you that in its forecasts, though it may hint at it in its less diplomatic and more interesting essays.
It doesn't want to offend the airplane's owners, nor alarm the passengers.
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