The outlook for world economic growth has dimmed, with recession a possibility both in Japan and the United States, the International Monetary Fund says in a report released this week calling for cuts in interest rates and taxes to keep growth going.
The IMF says growth in the United States this year would plummet to 1.5 percent, the lowest rate in a decade and less than a quarter of last year’s robust 5 percent growth rate.
The US economy remains at risk of recession because of a big slump in business investment and stock prices, an “unsustainable” trade deficit running at more than $300 billion a year and a record low personal savings rate of minus 1.3 percent, which could force consumers to cut back spending, the IMF report says.
Any recession in the United States caused by these substantial “imbalances” would pose a serious risk of dragging much of the rest of the world into recession as well, says the IMF.
But the international lending agency nevertheless predicts that the United States and the rest of the world would muddle through, thanks mostly to this year’s big dose of rate cuts provided by the Federal Reserve and a projected 8 percent drop in oil prices from record highs set last fall.
Global growth will fall this year to 3.2 percent and gradually pick up next year to 3.9 percent, the IMF predicts.“We are clearly looking at a substantial and broadly distributed slowdown in global economic growth this year but not, or at least not yet, at a recession,” says the IMF’s chief economist, Michael Mussa. With the United States moving aggressively to counter its economic slowdown and Japan having pulled every lever as well, cutting interest rates to zero and posting record government deficits in an all-out effort to stimulate the economy, Mussa aims his criticism at Europe, where official action has lagged.
The European Central Bank just yesterday passed up an opportunity to lower interest rates, despite mounting pressure from abroad to help avoid a worldwide slump. Growth in Europe has abated slightly, but its economy is expected to expand by a relatively respectable 2.4 percent this year.
“In a period when general economic slowdown is the main problem and when inflation is not likely to be a continuing threat, the euro area — the second-largest economic area in the world — needs to become part of the solution rather than part of the problem,” Mussa says. Stronger growth in Europe would not be enough to replace waning growth in the United States and Japan, Mussa said.
The IMF also applauds efforts by some European countries to cut personal and corporate tax rates, brightening the outlook for growth in the region. Stanley Fischer, the IMF’s deputy managing director, stresses that the world economy currently is in a period of “considerable uncertainty,” making it particularly important for leaders of each country to be ready to act.
The agency urges Japan to refrain from running ever-larger government deficits to spur growth, but rather get on with the business of cleaning up the massive overhang of debt held by Japanese banks. Despite record deficits, Japan’s huge public-works spending programs in the last decade have failed to spark growth.
Japan’s new Prime Minister, Junichiro Koizumi, has promised reforms in banking and several other key areas that economists say could produce the kind of turnaround called for by world leaders.
Canada and Mexico are facing big slowdowns because of their close connection with the US economy. Developing countries in Asia, Latin America and Eastern Europe have fared relatively well, despite the US slowdown.
But the future of their economies very much depends on a turnaround in the United States, the IMF says.
The IMF is expected to announce it is offering another $10 billion to Turkey to cope with its financial crisis.
Private economists credit the IMF with helping to prevent a spillover effect from Turkey’s crisis this year like the Asian contagion that swept the world two years ago.
“Emerging markets are less vulnerable today than they were during the Asian crisis, thanks to more flexible exchange rates, reduced debt levels, and a more responsive IMF,” says Sara Johnson, researcher with Standard & Poor’s.
She also does not expect a recession in the United States or globally this year, though Standard & Poor’s is forecasting slower world growth — 2.3 percent this year — than the IMF foresees.
