IMF forecasts weak global recovery due to Iraq War
Thursday, April 10, 2003
WASHINGTON -- The global economy will experience slower-than-expected growth this year because of the Iraq war, and if the conflict does not end quickly the consequences could be much more serious, the International Monetary Fund said Wednesday.
In its latest economic forecast, the IMF slashed its projection for global growth this year by one-half percentage point. It blamed most of the downward revision on the jump in oil prices that occurred late last year and early in 2003 as markets grew worried that a U.S.-led invasion of Iraq would disrupt global oil supplies.
The IMF noted that since mid-March oil prices have retreated somewhat and global stock markets have rebounded, two favorable developments which it said should support its reduced forecast of 3.2 percent global growth this year, down from a 3.7 percent projection the IMF made in September.
Quick end to war sought
But the IMF cautioned that this scaled-down forecast would be seriously jeopardized if the war in Iraq does not end quickly.
"A more prolonged and destructive conflict in Iraq could have a severe impact on global activity," the IMF said. "Such a development would clearly slow -- and could choke off altogether -- the already fragile recovery in industrial countries."
IMF chief economist Kenneth Rogoff said that even with a quick conclusion to the Iraq war, the global economy will be facing a number of other risks from the lingering effects of the bursting of the stock market bubble and the rising threat of a housing bubble in the United States.
"For the past three months, concerns over conflict in the Middle East have weighed heavily on the global economy," Rogoff told reporters Wednesday. "But in our view, it is not just the war -- a number of other risks weigh on the outlook."
The IMF projection of 3.2 percent growth this year would be only slightly better than the 3 percent increase in global output in 2002. For 2004, the IMF projected a significant rebound to 4.1 percent growth as oil prices retreat further and global financial markets begin to recover from a prolonged slump in stock prices.
The IMF's latest "World Economic Outlook" predicted that the U.S. economy would grow by just 2.2 percent this year, 0.4 percentage point below its September estimate. The IMF forecast U.S. growth would rebound to 3.6 percent in 2004.
The U.S. performance would still be far better than other major industrial countries. Growth in the 12 nations of Europe that use the euro as a common currency was projected at a weak 1.1 percent this year and a slightly stronger 2.3 percent in 2004.
Japan, which has struggled for more than a decade with a slumping economy and now deflation, was projected to see growth of just 0.8 percent this year and a still-weak 1 percent in 2004.
The IMF said the global economy remains seriously imbalanced, with the United States supplying most of the forward momentum because of the failure of Europe and Japan to jump-start their own economies.
The IMF said America's rising trade deficit was a "a source of serious concern," especially in light of the fact that the U.S. government's budget deficit has begun to rise, increasing the need for the country to tap global capital markets at a time when the U.S. dollar is weakening in value against other currencies.
Rogoff termed President Bush's request for another round of $726 billion in tax cuts to jump-start the U.S. economy awkwardly timed in light of the billions of dollars needed to pay for the Iraq war.
Outside of the industrial countries, the IMF projected some improvement in economic growth in the developing world, although it said that the new deadly Asian virus called severe acute respiratory syndrome (SARS), by curtailing tourism and business travel, posed a threat to growth forecasts in that region.
The IMF's latest economic forecast was prepared for the spring meetings of the IMF and World Bank that will begin Friday with preliminary talks among finance officials of the world's seven richest industrial countries: the United States, Japan, Germany, France, Britain, Canada and Italy.
The Bush administration is hoping to use those talks to help heal the rift that occurred between the United States and many of its European allies over the war in Iraq.
Administration officials said the G-7 discussions and the IMF and World Bank meetings would be used to begin building support among the allies for helping in the reconstruction of Iraq once the war ends. Officials said they did not expect to get pledges for specific amounts of support at these meetings.