DUBAI, Sept 18 - The world's economy is showing signs of life but ballooning United States budget and trade deficits could spell trouble ahead, the International Monetary Fund said on Thursday. One of the lurking perils as global trade imbalances readjust may be a steep further fall in the U.S. dollar, an economic burden the IMF wants developing Asia to share. "It is bad enough that the global economy has been flying on one engine but it is going to be a lot worse if it has to land on one wheel," Kenneth Rogoff, the IMF's chief economist, told a news briefing on the fund's semi-annual World Economic Outlook. In the report, the Washington-based lender maintained its world growth outlook of 3.2 percent for 2003 and saw a more robust expansion of 4.1 percent next year.
"For the first time in what seems like a very long time, we are reasonably optimistic about seeing a return to normal growth in the global economy or perhaps even better," Rogoff said.
TIGHT SECURITY
Optimism about the recovery comes as Group of Seven finance chiefs prepare to meet in Dubai, one of the United Arab Emirates, at the weekend on the fringes of the first-ever IMF annual meeting in the Middle East. Dubai is banking on the meeting -- one of the rare ocasions where financial leaders of rich and poor nations congregate in one place -- to promote itself as a Gulf trade and tourism hub. The world's finance ministers and central bankers will gather under heavy security in a sector of the desert city blocked to all but official vehicles and buses. Hundreds of khaki-clad police and plain-clothes security officials staffed entrances and halls of a new deluxe $210 million convention centre near Dubai's World Trade Centre. Security concerns were exacerbated by the planned arrival early next week of a big Israeli delegation, led by finance minister and right-wing politician Benjamin Netanyahu. Anti-Israeli sentiment is running high in the region with Israel and the Palestinians locked in an escalating conflict. Organizers in Dubai tried to play down Israel's participation, saying the Israelis were only one of 184 delegations. The UAE, like most Arab countries, has no diplomatic ties to Israel but has to host those whom the IMF invites. A Palestinian delegation will also attend and is expected to meet with G7 finance chiefs during the event.
REBOUND TO BE UNEVEN
For the IMF, it was business as usual. The fund said the nascent economic rebound may be uneven with the United States and emerging Asian economies leading and and Europe still struggling to turn the corner. "For the moment, most Europeans who want to see an economic recovery will have to watch it on TV," Rogoff said. The fund also fretted the recovery has not produced more jobs, while a possible housing bust in some countries posed another risk, especially once low interest rates rise. The IMF jacked up its U.S. forecast and predicted the economy would expand 2.6 percent this year and 3.9 percent next, up from April's forecasts of 2.2 percent and 3.6 percent
"The United States has the best recovery that money can buy ... It's borrowing a great deal in order to sustain this very high recovery," Rogoff said of big budget and trade deficits. The IMF raised its forecast for Japan but said it was too soon to declare the world's second-largest economy out of the woods despite stronger economic growth. Trade with emerging Asia, including China, fuelled short- term growth in Japan but corporate and bank balance sheet woes, soaring government debt and deflation lingered, Rogoff said. The IMF warned policy-makers not to be complacent and said they should be ready to manage fallout from a further depreciation in the U.S. dollar.
The brunt of the trade adjustment has thusfar been borne by the euro zone, Canada and smaller industrial countries. "With the pace and robustness of the recovery still unclear, and inflationary pressures low, monetary policies should remain accommodative for the time being; fiscal policies increasingly need to focus on medium-term consolidation, especially given coming demographic pressure," it cautioned.
INFLEXIBLE ON FLEXIBILITY
G7 finance chiefs are floating the idea of meeting with Chinese officials in Dubai to discuss making the yuan more flexible to spread the pain of the trade imbalances. Officials in the United States, Japan and Europe have been pressuring China over its yuan peg of about 8.3 to the dollar. Manufacturers say this keeps Chinese exports artificially cheap. But China's central bank chief resisted the pressure. "China's (currency) reform is a gradual one. You can't expect sudden changes, very radical ones, of the exchange rate regime," Zhou Xiaochuan, governor of the People's Bank of China said on Thursday during a visit to Hong Kong. German Finance Minister Hans Eichel seemed keen to avoid the fray, telling newspaper Die Welt that while there are signs the yuan is undervalued, the current rate "poses no danger" to Germany. "I expect China will create the conditions for medium-term flexibility," he added. The IMF said euro zone growth was being reined in by the euro's strength and weakness in Germany, adding that the European Central Bank may need to cut interest rates again.
The comments pushed euro zone government bond yields lower. Rogoff told in an interview a further euro rise was warranted given fundamentals but would not be good news for the common currency bloc's recovery if it happened now. The fund halved its 2003 GDP growth for Europe to just 0.5 percent and expects only 1.9 percent growth in 2004, versus 2.3 percent in April.//