-- IMF: Recession Risks Tied to War Duration --
By Glenn Somerville
WASHINGTON (Reuters) - The longer the war in Iraq drags on,
the greater the risk the United States will slide back into
economic recession, the International Monetary Fund said on
Wednesday.
However, hopes were rising that the war would end quickly
on Wednesday with Saddam Hussein's rule in Baghdad collapsing
in chaos and U.S. troops tightening their hold on the city. The
IMF report was prepared before the latest U.S. action on the
Iraqi capital.
In its semiannual review of global prospects, the fund said
it was likely that very low levels of interest rates and the
possibility of lower U.S. taxes will "cement recovery" and
enable gross domestic product to grow 2.2 percent in 2003 and
3.6 percent next year.
But steady expansion for the world's largest single
economy, accounting for about one-quarter of total world
output, was not guaranteed.
"Clearly, the most immediate risk relates to the potential
for a protracted war with Iraq, which would worsen the fiscal
position temporarily and -- through higher oil prices and
weaker confidence and stock market prices -- create potential
for a double-dip recession, even with an appropriate further
easing of monetary policy," the IMF said in its World Economic
Outlook report.
The fund praised the U.S. Federal Reserve for cutting its
key federal funds interest rate to a 41-year low last November
but said rates could move lower if recent weakness persists.
"The present stance of monetary policy appears appropriate
for the time being, although further cuts should be considered
if the recent weakness in economic indicators is sustained,"
the IMF said.
BUBBLE TROUBLE
The IMF said the war was not the only threat to a crawling
recovery from the slump in the opening nine months of 2001.
"Beyond this, a key risk relates to whether bubble-period
excesses have fully worked themselves out," the fund said,
noting still-significant unused U.S. factory capacity, fairly
high equity valuations and lofty housing prices were issues to
worry about if a slump occurred.
As always, the IMF expressed concern about persistently
large gaps in the U.S. current account -- the broadest measure
of trade in goods and capital with the rest of the world.
The current account deficit is mostly funded by borrowing,
the IMF noted, and any interruption of the money from other
nations could cause "an abrupt drop in the dollar that could in
turn trigger upward pressure on interest rates and a disruption
of recoveries both in the United States and abroad."
The fund said policymakers in parts of the world, notably
the United States, Britain and Canada, had relaxed monetary and
fiscal policy more than in Europe and Japan.
"This pattern -- reinforced by recent exchange rate
movements -- is expected to continue in 2003, and will tend to
increase global dependence on U.S. growth," the IMF said.
It foresees the global economy growing this year and next
at rates that outstrip the U.S. economy, 3.2 percent this year
and 4.1 percent in 2004.
But the overarching uncertainty looming over all of this,
in the IMF's view, is the war in Iraq.
RISKS ON DOWNSIDE
"On balance, the risks ... remain distinctly on the
downside, the more so the longer the war continues," the IMF
said, adding that a drawn-out and destructive conflict "could
have a severe impact on global activity" by driving oil prices
up and consumer optimism down.
The global outlook depends heavily on U.S. prospects, the
IMF said, at a time when global imbalances are highlighted by
big U.S. trade deficits and significant surpluses in Japan and,
to a lesser extent, in Europe.
There is a chance the imbalances will resolve themselves
benignly, given the dollar's depreciation over the past year
that has raised import costs for Americans, but the fund warned
that "the dollar still appears significantly overvalued."
It added that U.S. budget deficits were also worrisome now,
since any effort to get the budget under control through
measures like less government spending would mean slower U.S.
growth, adversely affecting the rest of the world.
The IMF took a swipe at the Bush administration's
$726-billion tax-cut plans, which are billed as an economic
stimulus, by saying that "if enacted in full, they will
significantly worsen the medium-term fiscal position."
In general, the fund said "the sense is that the (U.S.
economic) soft spot will fade only gradually," because
consumers and businesses will be reluctant to invest while
global worries about war and terror remain high.
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09-Apr-2003 15:04:03 GMT
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