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Date: Sat, 22 Dec 2001 14:58:06 PST
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Subject: [R-G] IMF warns of worldwide recession--or `worse' -
The Chicago Tribune
December 19, 2001
IMF warns of worldwide recession--or `worse'
By William Neikirk Washington Bureau
WASHINGTON -- The International Monetary Fund predicted Tuesday that the
global
economy will sink dangerously close to a recession in 2002 and said "there
is a
significant possibility of a worse outcome."
The international lending agency revised its economic forecasts sharply
downward in
the wake of the Sept. 11 terrorist attacks, which it said had damaged
consumer and
business confidence around the world.
The IMF's gloomier outlook raised the specter of the first synchronized
global recession
since 1975, which many private economists believe is a virtual certainty
with Japan and
the U.S. in recession and Europe sliding toward one.
A synchronized recession is difficult to escape. Usually, one region facing
a downturn
depends on others to pull it back to prosperity. For example, strong growth
in the U.S.
helped Asia out of its financial crisis in 1998.
But the IMF's report, plus interviews with private economists, make clear
that no
country or region will rebound sufficiently in 2002 to serve as an engine
for growth.
The IMF predicted only a 0.7 percent growth rate in the U.S. and 1.3 percent
in
Europe next year, while Japan's economy was projected to decline by 1
percent.
The institution, known as the lender of last resort to countries in
financial trouble,
forecast world economic growth of 2.4 percent in 2002, down 1.1 percentage
points
from its pre-Sept. 11 outlook. Economists say global growth of less than 2
percent
qualifies as a world recession.
Even at that, Robert Aliber, economics professor at the University of
Chicago,
questioned whether the IMF's outlook was too upbeat. "It's hard to see where
the
positive growth is coming from," he said.
Economist Donald Straszheim, a California consultant, and Gary Hufbauer, an
economist at the Institute for International Economics in Washington, also
said the IMF
seemed to be too optimistic. Hufbauer speculated the agency shied away from
predicting a world recession "for political reasons. I think they thought it
would be a
self-fulfilling prophecy."
U.S. recovery predicted
Many economists believe the U.S. recession will abate in 2002, with a
recovery
expected sometime between spring and fall.
"I don't think this will be a rapid recovery," Straszheim said. "Just like
1990-91, the talk
will be about a jobless recovery. ... We aren't going to be a strong engine
with a
relatively slow and sluggish economy."
Kathleen Stephansen, international economist at Credit Suisse First Boston,
added:
"It's going to be more difficult for the U.S. to fulfill that role of
locomotive to growth. The
U.S. won't have the typical rebound of consumer demand as in the past." Nor
will
business investment serve as catalyst for growth as it did in the 1990s, she
said.
The IMF said in its outlook that the attacks caused a "sharp deterioration
in confidence
across the globe" and worsened the ability of some "emerging" markets to
finance
their debts, a reference to Argentina. "As a result, prospects for global
recovery have
been set back significantly," it said.
The most worrisome part of the report was its emphasis on the risks for
sharper
economic downturn. "The possibility of a worse outcome remains the major
policy issue
at the current juncture," the report said.
It cited such risks as a lingering effect on consumer confidence due to the
terrorist
attacks, the dampening impact of consumer indebtedness, and a continuing
overcapacity of businesses to produce.
More monetary easing to lower interest rates in the U.S. and other countries
may be
necessary, the IMF said, and an economic stimulus package in America "could
be
helpful if implemented rapidly."
Tax cuts that Congress approved last June and additional spending since the
Sept.
11 attacks could add $375 billion in extra fiscal stimulus to the U.S.
economy over the
next three years, IMF economists said.
The IMF forecast saw world recovery arising from several factors: Lower
interest rates
in the U.S. and other major industrial countries, lower oil prices and
inflation, a
shrinking of a glut of inventories caused by business overinvestment in the
1990s, and
improved fiscal conditions of many governments that once were in deep
deficit.
Global rebound in 2003?
Many analysts believe the world will pull out of the downturn together just
as it went
into it simultaneously. But that means it might be 2003 before the rebound
gathers
much strength and spreads globally. "I anticipate a relatively subdued U.S.
economy
until the fourth quarter of 2002," said John Vail, chief strategist for the
global
derivatives division of Fuji Securities in Chicago.
The IMF also forecast similar timing. Chief economist Kenneth Rogoff
predicted the
U.S. recovery would begin in the second half of 2002. The IMF said that as
the
recovery shows itself next year, "global growth for 2003 as a whole would be
expected
to bounce back sharply."
The simultaneous worldwide downturn will make it harder for Japan to reform
its deeply
troubled banking system and may delay economic reforms in Europe, the IMF
said.
Except in Japan, where falling prices have caused consumers to delay
purchases and
business to invest, the IMF did not dwell on the threat of deflation.
William Wilson, economist at Ernst & Young in Chicago, said he is concerned
that the
worldwide slowdown also will have a significant negative impact on U.S.
exports. In
2001, he said, exports will decline for the first time since 1982. "That is
ominous. Over
the past decade, they have accounted for one third of U.S. economic growth."
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