27 August 2003, 15:25  IMF cuts global growth f'cast, sees risks ahead

MILAN, Aug 27 - The International Monetary Fund is set to cut its global growth forecast, warning there are still significant risks to a budding economic recovery, but leave its U.S. outlook unchanged. The IMF plans to trim its 2003 global growth forecast to 3.1 percent from 3.2 percent, keep its U.S. outlook unchanged at 2.2 percent and cut its forecasts for Germany and the euro zone, according to a summary of a draft report obtained by . In its draft World Economic Outlook, due to be submitted at the annual meetings of the IMF and World Bank in Dubai next month, the IMF sees global economic growth accelerating in the second half of 2003 and reaching 4.0 percent in 2004, with U.S. growth seen at 3.6 percent next year.
However, the draft cuts the euro zone growth forecast to 0.7 percent in 2003 from 1.1 percent, with 1.9 percent growth seen in 2004, and warned there were a number of downside risks to a global economic recovery.
They included:
- uncertain after-effects of the burst stockmarket bubble on investment in industrial nations;
- the high U.S. current account deficit which harbours the danger of a 'disorderly' adjustment of exchange rates;
- a strong rise in real estate prices in some industrial nations;
- continued vulnerability of highly indebted emerging economies to a deterioration in financing conditions on international capital markets;
- particular risks for Japan and, to a lesser extent, Germany.
The draft raises the Japan forecast to 1.1 percent from 0.8 percent for 2003 with 0.8 percent growth seen in 2004.
U.S. DEFICIT WARNING
It warns of a risk of "disorderly" exchange rate movements resulting from the high U.S. current account deficit. It also sees the U.S. budget deficit reaching 6.1 percent of gross domestic product in 2003, with a structural deficit of 5.2 percent of GDP, and expects only a slight decline in 2004. It says "unprecedented" monetary and fiscal policy stimulus could boost U.S. growth in 2004 beyond its 3.6 percent forecast, but reproaches the country for its fiscal indiscipline. "It criticises the U.S. government's excessively optimistic assumptions regarding the development of overall state spending and revenues and the lack of a medium term concept to consolidate budgets and reform the social insurance system," the draft says.
The White House last month predicted that federal budget deficits would balloon to $455 billion this year and $475 billion in 2004, even without factoring in the mounting cost of the U.S. occupation of Iraq. The draft cuts the IMF forecast for German GDP growth to zero in 2003 from its April forecast of 0.5 percent growth. It predicts growth of 1.5 percent in 2004, but says the country faces a possible mild decline in prices.
"This includes for Germany the risk of an - albeit mild - price decline as well as the financial sector, whose resilience is additionally threatened by continued economic weakness," the draft report says. It cuts the forecast for France to 0.8 percent for 2003 from 1.2 percent and sees 1.9 percent growth in 2004. The draft says monetary policymakers in industrial nations should continue to support the economic upturn and urges the European Central Bank to "take account of the fact that negative developments in individual countries can potentially influence the entire currency area". The ECB cut its benchmark lending rate by 50 basis points to 2.0 percent in June and is not seen cutting again until towards the end of this year.//

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