BBC- London - 10/01/98
There are worried economists at the IMF's headquarters
The world economy is in a fragile state with economic growth hanging in the balance, according to the latest forecasts from the
International Monetary Fund (IMF).
In its twice-yearly world economic outlook - released on the eve of its annual meeting in Washington - the IMF reduced its forecast
for world economic growth in 1998 to 2%, down from a forecast of 3.1% made just six months ago.
It described the world economic situation as "unusually fragile" warning a world recession is still possible.
The IMF is not yet predicting a global recession "but clearly we have been approaching that state," said IMF chief economist
Michael Mussa.
He defined a global recession as a year when world economic growth fell below 1%, noting that there has not been a single year in
the past 30 years when the world economy actually shrank.
However, Mr Mussa said that if US economic growth slows more than the IMF is predicting next year, the Asian recession worsens,
and emerging markets suffer a further loss of investor confidence in 1999, this outlook will change.
"That is the worst-case scenario that could push the world economy" into recession, he said.
Risks escalating
The report said: "Chances of significant improvement in 1999 have also diminished and the risks of a deeper, wider and more
prolonged downturn have escalated."
However, it forecast a moderate recovery in global growth to 2.5% next year but added that "a significantly worse outcome is clearly
possible".
Calls for rate cuts
Mr Mussa threw the IMF's weight behind growing global calls for cuts in interest rates to help restore damaged investor confidence.
"The need is to move to easier monetary policy around the world and that is what we are recommending for 90% of the world's
economy," he said.
The IMF welcomed the U.S. Federal Reserve's decision to cut interest rates on Tuesday and said more easing moves may be
needed in the months ahead.
Share markets' role
It also warned that further falls in Western share markets could spark a new panic in Asia creating a vicious cycle of financial
negative shocks.
The report said that if capital flows from the West to emerging markets, especially Latin America, are cut further, the world economy
will have to absorb yet another hit.
If there is a real threat that existing investment capital in Latin America might be withdrawn by Western investors "it can and must
be contained", the IMF warned.
Under scrutiny
The IMF and the World Bank have begun their annual meetings under the scrutiny of government and central bank officials from
around the world amid what could turn out to be the world's worst financial crisis since World War II.
The IMF, under its director Michel Camdessus, is on the front line of Western efforts to contain the contagion which has spread
through the emerging markets of Asia and Russia, threatening Latin America and the West itself.
Fears of economic recession spilling over from affected emerging markets to the Western industrial economies prompted the US
central bank, the Federal Reserve, to cut official interest rates by 0.25 percentage points this week.
Federal Reserve chairman Alan Greenspan has identified the contagion as the major threat to the US economy in coming months
and he is prepared to see rates cut further to ward off a downturn in the US.
The release of forecasts of slower growth by the IMF may well fuel the growing criticism of the global finance authority that it has
largely failed its brief. It has not been able to prevent the spread of the financial crises and the ensuing economic downturns
affecting much of the world.
This has prompted calls by US politicians, UK prime minister Tony Blair and the French president Jacques Chirac for an overhaul of
the IMF. |
