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. Last Updated: 07/27/2016

IMF Sees Grim Economic Future

WASHINGTON -- The global economy has not recovered as well as expected, will likely perform below par next year and the situation is likely to get worse rather than better, the International Monetary Fund said Wednesday in its bleakest assessment of global prospects in years.

The IMF's latest World Economic Outlook, which takes the pulse of economies around the world, leaves the 2002 global economic growth forecast unchanged from its 2.8 percent April forecast. The figure is unchanged only because activity in the first three months of this year was better than expected -- but, crucially, output has been lackluster since then.

That leaves the global growth forecast cut to 3.7 percent for 2003, down from an earlier 4 percent. But the report held little optimism about even that modest performance.

"Concerns about the pace and sustainability of the recovery have risen significantly," the IMF report said, adding that, "The risks to the outlook are primarily to the downside."

Growth predictions for the United States -- the engine for global growth in recent years -- has been notched lower for this year and slashed for next year with the outlook heavily clouded by how dwindling equity prices will affect spending.

European growth is flatter than previously thought and reasons for optimism there are few and far between. Forecasts for Japan -- still in recession and highly fragile -- are better than in April but are hardly a cause for cheer.

Latin America is stuck in recession, dragged down by Argentina where the economy is contracting twice as quickly as the United States' did in the Great Depression of the 1930s. And a recovery in the region depends heavily on the United States.

In many respects, the latest World Economic Outlook paints a picture of a global economy stacked precariously like a house of cards, waiting for a hit from just one more morsel of economic misery to bring on a global recession.

The U.S. economy is seen expanding by 2.2 percent this year, down from a 2.3 percent April forecast. Next year the world's richest economy will grow by 2.6 percent, lower than April's 3.4 percent estimate. That weaker outlook means the U.S. Federal Reserve should hold interest rates steady and be ready to cut them if the outlook weakens further, with the stock market a large influence on prospects.

"We agree with the Federal Reserve's current policy stance that indicates a bias toward easing" interest rates, IMF chief economist Kenneth Rogoff told a news briefing, adding that improving the budget situation was the medium-term goal.

In the euro area, "the scope for easing [interest rates] has increased, and should be used if activity remains weak and inflationary pressures ease as expected," the report said.

"There is enormous potential for growth in Europe that needs to be unlocked," Rogoff said. "Over the coming decade, Europe needs to decide whether it's going to be a locomotive of the world economy or a caboose."

Growth forecasts in the 12-nation European Union have been cut to 0.9 percent this year from April's 1.4 percent estimate, based on "extremely weak" domestic demand. In 2003, Europe's expansion is seen at 2.3 percent, below April's 2.9 percent prediction. Things could be worse if Germany's economy remains weak.

Deflation, exacerbated by the yen's recent rise, remains a big concern in Japan. That means "further [monetary policy] easing is warranted."

A recession of 0.5 percent is forecast for this year with growth of 1.1 percent next year.

Rogoff warned Japan to undertake rapid reforms or it could face years of recessions and falling prices.

The IMF reiterated that the U.S. dollar, despite its recent decline, remains overvalued and that the U.S. trade deficit is not sustainable and poses a "significant risk" of "an abrupt and disruptive adjustment."

That risk has been exacerbated by the fact that Europe has yet to undertake reforms to make labor markets more flexible, and Japan's reluctance to tackle its twin woes of an almost bankrupt banking sector and debt-ridden corporations.

Rogoff declined to speculate whether a war in Iraq would spark a global recession, saying only that the global economy would benefit from "steps to bring a greater deal of world peace."

Some spots in the world are still enjoying good growth despite the gloom. Notable among them are former Soviet states, including Russia, Asian economies, including China, India and South Korea as well as Australia and New Zealand. In Europe, Ireland's Celtic Tiger economy is still expanding solidly.