ECONOMY: IMF’s World Outlook Hinges on U.S.

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Sep 27 2001 (IPS) - The world economy was on course to its worst annual performance since 1993 even before this month’s terror attacks in the United States, according to the IMF.

The agency predicted a rebound next year on the strength of aggressive U.S. and European economic stimulus packages. Some economists remained unconvinced.

The Fund, in its latest World Economic Outlook report, prepared before the Sep. 11 attacks and released here Wednesday, reduced its growth forecast for this year to 2.6 percent, down from 3.2 percent predicted five months ago. The world economy grew by 4.8 percent last year.

Growth in developing countries as a whole would reach 4.3 percent this year, down from 5.8 percent in 2000, the IMF said.

The most pronounced slowdown û from 8.2 percent last year to only about one percent this year û would be among Asia’s newly industrialised countries, which have been hit hard by slackening demand in Western export markets, especially for electronics.

Latin America’s growth rate would fall from 4.2 percent last year to 1.7 percent this year, the IMF said, largely because of Argentina’s financial woes and Brazil’s energy and political crises.

By contrast, the IMF upgraded its projection for China to 7.5 percent for this year, up 0.5 percentage points from its forecast in May.

Growth in Africa, though slowing, also would end the year stronger than in 2000, the Fund said, as there have been fewer natural disasters and some security problems have eased.

The United States û which alone accounts for nearly one-fourth of world economic output, is driving the downturn as its economy slumps and its consumers lose confidence.

The IMF projected 1.3 percent U.S. economic growth for the year, 0.2 percentage points lower than its prediction in May and down from 4.1 percent last year. Fund chief economist Kenneth Rogoff said the rate could fall to near zero but likely would recover next year. The IMF report projected next year’s growth rate at 2.2 percent.

Japan, the world’s second largest economy, would continue to ride out its fourth recession of the past decade as GDP actually shrinks by 0.5 percent this year, the IMF said.

Rogoff said the Sep. 11 attacks are “having a negative effect on activity now in many regions of the globe,” although it is “premature to try and quantify the implications” for U.S. and global growth.

Agency economists played down concern that the attacks would exert long-term downward pressure on the world economy.

In the immediate aftermath, central banks moved fast to support payments systems, averting a catastrophic loss of confidence among banks and financial markets. Last week, the U.S. Federal Reserve lowered its key interest rate by 0.5 percentage points, leading to similar moves by other central banks.

Rogoff said the expected surge in U.S. spending on defence and reconstruction, coupled with bailouts for airlines and insurance companies reeling from the events of Sep. 11, could help break the economic slowdown.

Others were not so sure.

Economist Henry Aaron, a senior fellow at the Brookings Institution, a think tank here, said Washington is not entering a typical war: Its exact enemy remains undefined and the type of conflict envisaged would not involve a substantial arms build-up û in short, the war might have little direct impact on industrial production.

Military expenditure, he added, is unlikely to rise from its current three percent of gross domestic product (GDP) to anywhere near the historic 40 percent peak during World War II.

By any standard measure, the aftershocks of Sep. 11 have been severe. The benchmark Dow Jones Industrial Average lost 14 percent in five days û meaning that investors lost some 1.4 trillion dollars. This, the IMF acknowledged, could add to consumers’ growing qualms about spending money.

The attacks also triggered a string of lay-off announcements among U.S. airline, aerospace and other industries. States dependent on tourism for government and business revenue have seen their incomes slashed as travellers stay at home.

Nevertheless Gene Sperling, a member of former President Bill Clinton’s council of economic advisers, said “there are still reasons for optimism on the long term. It all depends on whether we can prevent a global and domestic negative cycle from taking place. This is the big task and the big unknown.”

Citing strong fiscal performance and several years of solid job growth, Sperling said the U.S. economy remains fundamentally sound. Before Sep. 11, economists were predicting a recovery by Christmas. Now, “the first quarter of next year seems to be a possible point for a turnaround.”

Whatever the timing, “the American people will rally and decide and that they will not let the terrorists affect their way of life and return to normal spending patterns. That will prevent a negative cycle from taking place,” Sperling insisted.