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IMF forecasts global recession but still hopeful

The International Monetary Fund on Thursday forecast what amounts to a global recession for this year and next and admitted that making economic projections after the September 11 attacks was like "trying to read tea leaves."

At a news briefing to preview this weekend's IMF meeting in Ottawa, IMF managing director Horst Koehler forecast world economic growth of 2.4 per cent for both this year and 2002.

While Koehler said he did not see that forecast as indicative of a global recession, most economists view world economic growth below 2.5 percent as recessionary.

The latest estimates from the fund were much lower than the 2.6 per cent growth for this year and 3.5 per cent expansion next year that it forecast in October in a report compiled too late to gauge the full impact of the September 11 attacks on the World Trade Center and the Pentagon.

"We have to recognise that we face an extraordinary degree of uncertainty in the aftermath of the September 11 attacks. There is no real precedent for this situation, which makes forecasting based on previous experience look something like trying to read the tea leaves," Koehler said.

The international lender said the global economic situation was "difficult" but "manageable" and insisted it still sees a recovery next year despite an "extraordinary degree of uncertainty."

Growth forecasts were slashed for all three major economic powers -- the United States, Europe and Japan.

US growth is now forecast at 1.1 per cent this year and just 0.7 per cent in 2002, down from October estimates of 1.3 per cent and 2.2 per cent, respectively.

Growth in the European Union is now seen at 1.7 per cent and 1.4 per cent for 2001 and 2002, down from the earlier forecast of 1.8 per cent this year and 2.2 per cent next year.

And Japan is seen in outright recession both this year and next, with contractions of 0.9 per cent in 2001 and 1.3 per cent in 2002, compared with an earlier expectation of a 0.5 per cent contraction this year and 0.2 per cent growth in 2002.

Koehler cited the fall in energy prices and the "major" potential for technology-linked productivity gains as reasons to be hopeful that global economy will quickly rebound.

"So we have reason not to be overly pessimistic," he said. "What is needed now is to build confidence through sober analysis and sound policies, while making sure that we are prepared to deal with a worse outcome if that proves necessary."

He was forceful in his advice to the United States, Europe and Japan.

The IMF boss welcomed the aggressive monetary policy easing by the United States, but called on its largest and most powerful shareholder to "clarify its fiscal stimulus package." The US Congress has been locked in debate over how best to help an economy hit hard by the September 11 attacks.

The lender also welcomed the recent European Central Bank cut in interest rates saying it would have "significant impact," but Koehler said the absence of inflationary pressures "also leaves room for further easing, if necessary." He also said the 12-nation euro zone should keep its fiscal policy flexible, maintaining spending plans despite revenue falls to avoid an unwanted fiscal contraction.

"Japan too should avoid fiscal contraction," Koehler said, adding the recession-mired economy "should also inject liquidity more forcefully to counter deflation."

Koehler said the topic of tackling the funding of terrorism and money laundering will be on the agenda at the IMF/World Bank meeting this weekend in Ottawa. He said the IMF would work with all its members to develop the regulatory and legal framework to counter such activities.

In his remarks, Koehler said the actions of the fund need to be "part of a co-ordinated response by the entire international community." He said that the IMF has been working hard to assess the needs of its member countries and is prepared to help them cope with the economic situation.

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