DUBAI, 19 September 2003 — The global economic outlook has brightened since the end of the Iraq war, but the recovery from the sluggishness of the past two years remains fragile and is exposed to serious risks, the International Monetary Fund said yesterday.
“For the first time in a very long time we are reasonably optimistic about a return to normal growth in the world economy, or perhaps even better,” IMF chief economist Kenneth Rogoff said at a news conference presenting the fund’s World Economic Outlook report.
“It will not be balanced growth, Europe is struggling to turn the corner and Japan’s situation remains clouded, ... but an imbalanced recovery is better than no recovery at all,” he said.
However the IMF also warned that the recovery remains at the mercy of a range of risks, not least from the economic havoc that could be caused by a sharp plunge in the value of the dollar.
A further worry for the precarious economic situation was the failure of trade negotiators last week to reach an agreement in the Mexican city of Cancun to free up world trade, a setback described by the IMF as a “tragedy” for the poor.
The IMF, in its twice-yearly World Economic Outlook, pegged global economic growth at 3.2 percent for 2003 and 4.1 percent for 2004.
The global forecast was unchanged from April, but the IMF revised upward its growth projections for the United States and Japan, while downgrading the outlook for Europe, Canada and other advanced economies.
In its report, the IMF expressed concern that the world economy faces “widening global imbalances, and continuing dependence of global growth on the United States.”
A massive risk for the world economy remains the colossal US current account deficit as well as its mammoth budget deficit, the IMF said.
Rogoff said the current account deficit will have to unwind “some day”, potentially triggering a massive downward correction in the value of the dollar and a consequent rise in the euro that would badly knock Europe’s economy.
He called on Asian countries to allow their currencies - regarded by many as undervalued - to appreciate, so the euro does not have to bear the brunt of the dollar’s fall.
“Bad enough that the global economy has been flying on one engine, but it’s going to be a lot worse if it has to land on one wheel,” he said. Europe’s economic growth is currently lagging way behind the United States and a resurgent Japan. Rogoff said he only had “tepid” optimism about the continent’s economic prospects.
“For the moment most Europeans who want to watch an economic recovery will have to watch it on TV,” commented Rogoff.
The IMF shaved its growth forecast for the euro zone to 0.5 percent for 2003 and 1.9 percent to 2004, saying in the report the region’s slowdown “has been deeper and more prolonged than earlier expected.”
The US growth forecast was boosted to 2.6 percent in 2003, up from a 2.2 percent forecast in April, and to 3.9 percent next year, up from 3.6 percent.
For Japan, the IMF sharply boosted its forecast to show growth of 2.0 percent in 2003 and 1.4 percent in 2004. But Rogoff said it is too early to say if Japan - emerging from years of stagnation - is “out of the woods yet”, pointing to the continued problems with the country’s banking system.
“Underlying problems are still a major roadblock to sustain strong growth,” he said.
Rogoff said that the failure of the Cancun talks was a tragedy “not least because without stronger trade growth, global growth will eventually slow significantly and global poverty will rise.” The Oct. 10-14 Cancun meeting collapsed last weekend when delegates from industrial and developing nations failed to reach a compromise on subsidies offered to farmers in rich countries.
The IMF said developing countries would grow at a rate of 5.6 percent, led by a pace of 7.5 percent in China and 5.9 percent in India. Countries in transition, mainly the former east bloc nations, were expected to grow at a 4.7 percent rate.
In a statement that appeared to focus on China, the IMF said some countries should make “a gradual move to greater exchange rate flexibility.”
