WASHINGTON, April 8 - The head of the International Monetary Fund on Tuesday forecast global economic growth of a little more than 3 percent this year and urged Europe and Japan to do more to reinvigorate prospects. IMF Managing Director Horst Koehler told in an interview that the global economy in 2003 would expand by, "A bit more than last year (when growth came in at 3 percent) but not a lot more." "There is a risk of a worse outcome. Nobody can rule it out," he said, noting it is, "realistic that a moderate recovery is the most likely development." Koehler's comments came on the eve of the publication of the IMF's semi-annual World Economic Outlook, which takes the pulse of the globe's leading economies. Koehler said the global economic recovery, assuming a short war in Iraq, would pick up in the second half of this year but that lingering uncertainty about terrorism means that the world's major economies need, "really to accelerate reforms."
He also blamed Europe and Japan for not doing more to quicken needed reforms over the past year. Asked if the global economy would be expanding robustly had Europe and Japan carried out more reforms over the past 12 months, Koehler replied: "Yes, I totally agree with that." "If Europe and Japan would have accelerated their structural reform agenda, clearly their economies would have been ... more robust," he added. The IMF boss said the U.S. Federal Reserve's monetary policy to date had been appropriate and that the powerful central bank could cut interest rates if the economy weakened.
ROOM TO EASE
"I think the (Fed) still has some room for maneuver," he said. "Whether they should cut interest rates further" should depend on the outcome of economic indicators. "They can take the next step and, if things are really getting worse, they could even move to unconventional measures." The IMF chief said, "I don't expect a U.S. recession," but noted, "I can't rule it out." Koehler was obliquely critical of the Bush administration's proposed $726 billion tax cut plan, which is awaiting action from Congress. Koehler said the U.S. deficit was "manageable" but that "fiscal discipline in this leading economy of the world is important and we are indeed concerned." The United States, he said, should move toward a balanced budget over the medium term because "this process of building up deficits is not sustainable."
Overall he said the trend in the U.S. economy was good and the flexibility of policymakers and the political system in the world's richest economy, "can give us some comfort." But he said the European Central Bank should ease policy and Japan must do more to battle deflation. "In Europe clearly, the ECB has room for maneuver, if indicators deteriorate, they should use that room. I can't see that they have an inflation problem. They have crucially now a problem with business activity," Koehler said. "My own judgment is that it would help not just Europe, but also the global economy, if the ECB would take another (easing) step," he added.
GERMAN TURNING POINT?
Koehler was guarded in his praise for German Chancellor Gerhard Schroeder's wide-ranging package of labor market reforms, which went further than many expected but fell short of what many economists believe is needed. "I would have liked some stronger action," Koehler said. Still, passing Schroeder's package through parliament, "will be the turning point for the German economy with a recovery starting during the second half of this year," he said. On Japan, the world's second largest economy, which has fallen in and out of recession for the past several years, Koehler was straightforward in his advice. "They need to continue with monetary easing," he said, adding that, "(But) monetary easing is not enough if they are not going to forcefully implement the idea to restructure banks and corporations. My concern is that there is not enough political will to move with the speed which is necessary now." Still, he said, there had been much improvement in Japan's willingness to reform over the past year and there was some reason to be optimistic of more progress.
On the war in Iraq, Koehler said, "Iraq, even if it is a bit protracted will not derail the global economy." But he warned that fears of terrorist attacks "will hang like a cloud over investors and consumers" for years to come. That, he said, meant that world economic leaders needed, "a stronger sense of urgency that they have to do more to strengthen their (economic) growth fundamentals." Of even greater concern than a protracted war in Iraq, Koehler said, was the "nightmarish" scenario that would see conflict spreading beyond Iraq. Koehler spoke at length and in acerbic fashion about politicians in the world's leading economies being more interested in formulating policy from a "narrow-minded local and national interest" perspective instead of taking account of the broader global interest. "I am somewhat disappointed that we do not do much about globalization" beyond rhetoric, he said.//