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IMF: Post-Iraq, U.S. economy still at risk

By SHIHOKO GOTO, UPI Senior Business Correspondent   |   April 9, 2003 at 3:20 PM   |   Comments

WASHINGTON, April 9 (UPI) -- The U.S. economy still faces considerable downside risk, even with the Iraq war apparently about to conclude successfully, the chief economist of the International Monetary Fund cautioned on Wednesday.

The IMF also said that given the timing of the administration's tax cut proposals, the measures could hurt growth, not boost it.

The Iraq war has been a major factor depressing world growth prospects. But even when hostilities cease, there will be other negatives for the U.S. economy, said Kenneth Rogoff, the head of the IMF's research department, in releasing the institution's latest World Economic Outlook report.

For one, although Saddam Hussein's regime has essentially been toppled, the war against terrorism will continue, which means that security alerts and tensions will inevitably remain high. Further, said Rogoff, if U.S. economic conditions were seen in a developing country, it would sound "warning bells," Rogoff said.

He suggested that U.S. economic policy differs considerably from what the IMF would suggest for countries that needed to get their finances back into shape to qualify for loans.

The ballooning U.S. budget deficit, coupled with an ever-increasing trade account deficit, an overvalued dollar and open-ended security concerns will weigh on potential U.S. growth, he said. He said that while he agreed with some parts of Bush's tax plan, which would likely bolster longer-term growth, the timing wasn't right for tax cuts.

Also, he warned that U.S. housing prices could decline sharply from levels of recent years, while interest rates are likely to go up should government spending continue to accelerate.

"Higher deficits could lead to higher interest rates ... which could offset (the benefits of) taxes" and other benefits, said David Robinson, the IMF's deputy research director.

But U.S. doldrums are likely to hurt prospects for the global economy, given that U.S. gross domestic product growth accounts for about one-fifth of the world total.

For 2003, the IMF projects U.S. GDP growth of 2.2 percent, expanding to 3.6 percent the following year. Meanwhile, growth in the eurozone is pegged to be even more sluggish, only 1.1 percent this year and 2.3 percent in 2004.

As for Japan, its GDP growth is pegged at 0.8 percent this year, growing only to 1 percent the following year.

Growth in China, on the other hand, is expected to stay robust, with GDP expanding by 7.5 percent this year and next. Meanwhile, growth in developing Asian countries is anticipated to reach 6.3 percent in 2003 and 6.5 percent in 2004.

The IMF expects Asia, excluding Japan, to have the most robust growth over the next year. But since the United States continues to dominate the world economy, and most Asian countries depend heavily on robust external demand for growth, continued weakness in the U.S. economy could hurt Asia, too.

Moreover, the recent outbreak of the severe acute respiratory syndrome in the region could shave growth as much as 0.25 percent should it persist for more than one quarter, according to the IMF.

To stimulate growth in the world's richest countries, the IMF's chief economist suggested that the U.S., European, and Japanese central banks be more open about monetary policy, particularly in pursuing inflation targeting. Specifically, Rogoff said that the Federal Reserve Board could consider adopting a central range for inflation, which could in turn spur demand.

© 2003 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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