IMF warns of recession

WASHINGTON: New data this week highlighted a mood of caution at corporations in major economies as the International Monetary Fund (IMF) warned that the world could sink into recession if the war in Iraq drags on. 

US durable goods orders tumbled 1.2% in February, according to the Commerce Department. Weak demand for items such as computers, electronics and machinery weighed orders down, suggesting that businesses remained wary of investing. 

In Germany, the closely watched Ifo barometer of business confidence dipped unexpectedly to 88.1 from 88.9. The Ifo data, much of which reflected sentiment before the start of the Iraq war, dashed hopes that Germany’s enfeebled economy was on the mend. 

A report from a Japanese credit union showed small firms in that country planned to cut capital spending by 32% in the fiscal year starting in April.  

That was worse than the 16.8% year-on-year fall expected this fiscal year, according to a Shoko Chukin survey of about 2,700 companies. 

“It’s clear that the world economy is not on a strong footing in the first quarter,” said Lara Rhame, economist at Brown Brothers Harriman and Co in New York. 

Amid concerns about the Iraq war’s effect on economic activity, IMF managing director Horst Koehler said a lengthy war risked jeopardising global recovery. 

“In the case of a long lasting conflict a global recession can no longer be ruled out,” Koehler was quoted as saying by the weekly German Wirtschaftswoch

“It depends on how long the war lasts and what damage there is. But even a short war is an additional barrier to a recovery in the global economy. The uncertainty is prolonged. Many market participants will continue to hold back,” he said. 

Battlefield developments in Iraq have also made financial markets take stock. A powerful equity market rally has stalled, the dollar is treading water and oil prices have edged up – although they remain below peaks hit before the tanks started to roll. 

There are also signs that US consumers, faced with mounting job losses, are struggling to keep up with debt payments. The American Bankers Association said credit card delinquencies climbed to 4.07% of all accounts in the fourth quarter, up from 4% in the previous three months. 

Two important pieces of economic data still to come this week – the French business climate poll from INSEE and the March University of Michigan sentiment survey – will also include information gathered before the war. 

This is making messages from the real economy much harder to fathom, so some central bank policymakers say the only option is to keep their powder dry on interest rate cuts. 

“The international situation continues to be unclear. If that doesn’t change, then we will analyse the situation in Rome but will not come to a (rate move) decision,” European Central Bank (ECB) council member Ernst Welteke said. 

Welteke’s remarks reinforced market expectations that ECB policymakers would keep interest rates on hold when they meet in Rome on April 3. The ECB last moved on March 6 when it cut key rate to 2.5%. – Reuters  

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