*EPF308 04/12/00
IMF Report Sees Widespread Economic Recovery
(U.S. economy keeps rest of world moving) (1170)
By Warner Rose
Washington File Staff Writer

Washington -- The global economy improved dramatically during the past year as strong growth continued in the United States, European prospects improved and several countries recovered from deep crises, the International Monetary Fund's (IMF) World Economic Outlook Report says.

"All regions of the world are contributing to the strengthening of growth prospects," Michael Mussa, director of the IMF's research department, said at an April 12 press conference marking the release of the report, which is issued twice a year.

World economic expansion in 1999 is now estimated at 3.3 percent, the report said. World output in 2000 is forecast to rise 4.2 percent, it said.

The strong U.S. economy "played a major role" in helping the world through the shocks of 1997 and 1998 that "had the potential to lead to a global recession," the report said. "The U.S. has helped keep the rest of the world economy moving forward," Mussa said. The U.S. economy grew by 4.2 percent in 1999 and is projected to expand 4.4 percent this year, the report said.

Together the Group of Seven (G-7) major industrial countries is forecast to grow by 3.3 percent this year. Japan, the second largest G-7 economy, continues to be the poorest performer. After contracting in 1998, Japan's economy managed a 0.3-percent expansion in 1999 and is forecast to grow 0.9 percent in 2000. "We believe the Japanese economy is in the recovery mode and has been since last year" despite poor fourth-quarter figures, Mussa said.

Weak consumer spending continues to hamper Japan's recovery, Mussa said. If Japan's recovery "stumbles again," he said, the government there has few "policy tools to deal with the downward movement." Mussa said the Japanese should maintain their "zero interest rate" policy.

Growth is forecast in all the major industrialized countries in Europe. Mussa praised the new European Central Bank for the "appropriate" easing of monetary policy. Because Europe continues to employ rigid rules that make companies hesitant to create new jobs, European unemployment remains high, Mussa said.

Most of the emerging market economies in Asia hit by crises in 1997 and 1998 have achieved substantial recoveries, the report said. Korea's economy, which shrunk by 6.7 percent in 1998, grew 10.7 percent in 1999. Thailand's economy grew 4.2 percent and Malaysia's 5.4 percent in 1999. Indonesia, which contracted by 13.2 percent in 1998, grew by 0.2 percent in 1999. A major force behind these recoveries has been "faster-than-expected improvements in the volume and value of exports," which in turn reflected the continued growth in the United States and recoveries in Europe and to a lesser extent Japan, the report said.

Russia's economy contracted 4.5 percent in 1998 and its government caused a worldwide panic by defaulting on some of its debt. That economy grew 3.2 percent in 1999, the report said, driven by higher petroleum prices and reduced imports resulting from the ruble devaluation. Unlike other regions, Russia's exports have not increased with a lower value currency, the report added, noting that the recovery was built on "a rather narrow and not necessarily sustainable base." The impact of the war in Chechnya and the eventual reconstruction efforts on Russia's fiscal position and outlook also "are unclear," the report said.

In Latin America, Brazil's economy -- the region's largest -- grew 0.5 percent in 1999, marking a small recovery from the crisis in 1998, the report said. The entire region's economy, however, grew by only 0.1 percent last year, dragged down by contractions in Argentina, Chile, and Uruguay (less severe) and in Colombia, Ecuador, and Venezuela (more severe).

Looking ahead, the reports cited concerns about the "lopsided" pattern of growth among the major economies, the growing U.S. current account deficit and the need for inevitable slowdown of the U.S. economic expansion to be managed carefully.

Various factors have been responsible for the U.S. performance, including substantial increases in productivity growth made possible by high levels of investment, Mussa said. The United States, however, is now running an unprecedented deficit in its current account -- the combined balances on trade in goods and services, investment income and net unilateral transfers. "Up to this point the growth of that imbalance, all things considered, has been a good thing for the U.S. and world economy," he noted. But with the rest of the world beginning to grow faster, the imbalance can't continue, he said.

The consumer spending that has kept the U.S. expansion going should begin to decline in part because of increases in commodity prices, notably oil, and because a mortgage financing boom that put more money in consumers' pockets has run its course, Mussa said. The expectation that the U.S. Federal Reserve will continue its policy of raising short-term interest rates to slow the economy should bring the so-called "soft landing" after four years of very brisk growth, he said. The report predicts that U.S. growth will slow to 3 percent in 2001.

The report also cited "seemingly significant misalignments" of principle currencies compared to what they should be in the medium term -- notably the strength of the U.S. dollar relative to the European Union euro. The current situation poses risks that sudden changes in market sentiment, associated with capital flows, could bring "potentially disruptive realignments of exchange rates," the report said.

Finally, the report noted concerns about high stock market values around the world. "These may be justified in part by investors' favorable assessments of the impact of new technologies, but they may also reflect unrealistic expectations of future earnings growth that have been nourished" by the record U.S. expansion, the report said. Past experience has shown that inflated prices like these can encourage households and businesses to over-consume and over-invest with the danger that the financial system could be vulnerable to an eventual "downward correction" in prices, the report said.

Following are key projections from the report:
(Annual percentage change)
Current
Projections
1999 2000 2001

World Output 3.3 4.2 3.9

Advanced economies 3.1 3.6 3.0
Major industrial nations 2.8 3.3 2.7
United States 4.2 4.4 3.0
Japan 0.3 0.9 1.8
Germany 1.5 2.8 3.3
France 2.7 3.5 3.1
Italy 1.4 2.7 2.8
United Kingdom 2.0 3.0 2.0
Canada 4.2 3.7 2.7
Other advanced economies 4.6 4.5 4.1

Developing countries 3.8 5.4 5.3
Africa 2.3 4.4 4.5
Asia 6.0 6.2 5.9
ASEAN-4 2.5 4.0 4.4
Middle East and Europe 0.7 4.6 4.0
Western Hemisphere 0.1 4.0 4.7

Countries in transition 2.4 2.6 3.0
Central and eastern Europe 1.4 3.0 4.2
Excluding Belarus and Ukraine 1.5 3.6 4.6
Russia 3.2 1.5 1.4
Transcaucasus and Central Asia 4.4 4.9 3.7

Inflation (consumer prices)
Advanced economies 1.4 1.9 2.0
Developing nations 6.5 5.7 4.7
Countries in transition 43.7 19.5 14.2

(The Washington File is a product of the Office of International Information Programs, U.S. Department of State. Website: http://usinfo.state.gov)
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