FINANCE: IMF Forecasts Long and Deep Slowdown in World Economy

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Dec 19 2001 (IPS) - The current global economic slowdown will be long and deep with developing countries growing modestly as a result of the September 11 attacks on the United States, the International Monetary Fund said in its newly revised semi-annual forecast.

In the revised report released here Tuesday, the IMF said there will be ôa deeper and more prolonged global slowdown than foreseen” in its earlier October 2001 report.

The new prediction is for 2.4 percent growth this year down from the earlier 2.6 percent. For 2002 the downturn will be is much steeperfrom an earlier 3.5 percent growth forecast, the Fund is now predicting 2.4 percent.

ôThe tragic events of September 11 came at a time when, with all major regions already slowing, the global economy was particularly vulnerable to adverse shocks,ö the report said

Reflecting the impact of the terrorist attacks on US landmarks, the Washington-based institution said that its prognosis ôfor almost all regions of the world have been marked down compared with those in the October 2001 World Economic Outlook.

“There are many regions of the world that are clearly in recession: the United States, Japan, Germany have had two negative quarters of growth,” said IMF chief economist Kenneth Rogoff.

ôAnd there are many other countries that by many definitions of recession, you know, would be thought to be there (in recession). But the world includes countries such as China and India, which are very large and growing significantly.”

The Fund said it did not expect a turnaround until around the middle of 2002 as developed economies in the European Union, the United States and Japan could see a rebound on the back of stimulus packages and aggressive financial measures.

The directors of the 183-member financial institution said that after the Sep 11 attacks, consumer and business confidence eroded further across the globe. ôThere was a significant initial impact on demand and activity, particularly in the United States,ö the report said.

There was also an initial generalised move away from risky assets in both mature and emerging markets, including a substantial deterioration in financing conditions for emerging market economies.

As a result, growth in the advanced economies is now expected to be only 0.8 percent in 2002, down from an already weak forecast of 1.1 percent in 2001. It will be about two percentage points in the newly industrialised Asian economies.

For developing countries as a whole, the growth estimate for 2002 has been lowered by nearly one percentage point, with the largest reductions among countries of the Western Hemisphereespecially Argentina and Mexicoand also among the members of the Association of South East Asian Nations (ASEAN).

However, expansion of close to 4.4 percent is expected for the developing country group in 2002 compared to four percent in 2001, supported by relatively strong activity in China and India; a significant turnaround in Turkey’s economic prospects, and reasonably firm growth in some African nations.

The Fund also said it saw emerging markets facing tighter financing pressures as international investors demanded alternative and more secure locations to invest if the world outlook continued to worsen.

These concerns, the Fund economists say, are probably the strongest in Latin Americanotably in Argentina, which is experiencing renewed financial turbulence.

The economies of Central and Eastern Europe and the Baltics could also potentially be at risk in global financial markets, given the rather high current account deficits in most of these countries.

Commodity price slumps will take their heaviest toll on some African, Latin American, and former Soviet Union republics and Middle Eastern countries.

The downward pressures on prices of fuel and non-fuel commodities will compound the situation for the poorer nations.

ôRecent commodity price developments will have the most direct and sizeable impact in the Middle East, among the Commonwealth of Independent States (CIS), and in Africa, where many countries are heavily dependent on a narrow base of fuel or non-fuel commodity exports,ö the Fund said.

The report says that its forecast for emerging and developing countries was cut down because of the spill-over effects on trade and confidence from the recession in advanced economies.

The sharp reactions of advanced economy financial markets to the September 11 attacks were echoed and amplified in emerging markets, with falling stock prices, widening bond spreads, and weakening currencies, the Fund said.

In the developing world, the report said that the improvement in economic fundamentals in many developing countries in recent yearsnotably lower inflation, generally improved fiscal positions and the shift toward more flexible exchange rateshas increased the room for policy manoeuvre and resilience to external shocks.

But the IMF chief economist Rogoff cautiously sounded a positive note that there could be a strong rebound given the aggressive measures taken by the developed countries. He said that lower interest rates in the US, an economic stimulus package, lower oil prices could all contribute to a strong growth in 2003.

“Looking forward to 2003 we certainly would project quite strong growth,” he said Tuesday at a press conference.á “However, given the already difficult situation for the global economy and the large costs associated with a deeper slowdown, the possibility of a worse outcome remains the major policy issue.”