Options seen running out for policy-makers

WASHINGTON: Economic policy-makers around the world are running out of tools to boost the flagging global economy, according to a World Bank report just released. 

The bank said the US Federal Reserve, the world’s most influential central bank, had little room left to cut interest rates and expected it to leave them on hold this year if growth picked up slightly as expected. 

“A worrisome characteristic of the current economic environment is that macro-economic policies may be running up against their limits,” said the bank’s 2003 Global Development Finance report. 

In fact, policies this year and next were more likely to be less stimulative or “restrictive” than expansive, the bank concluded. 

The report came a day after the Institute of International Finance, a leading financial lobbying group, said the global economy was facing serious problems that would require a co-ordinated effort from rich nations to bolster prospects. 

The Iraq war was a major risk to the outlook and could knock off US$75bil to US$100bil from global economic growth in the first half of the year, the bank said. 

But even without the war, the world economy was still in a soft spot. 

“We’ve been constantly cutting our growth forecasts over the last year,” said Philip Suttle, lead author of the report. “Particularly important is that regardless of the war, general confidence just keeps slipping.” 

The bank has not made any estimates for the impact of the outbreak of the deadly Severe Acute Respiratory Syndrome (SARS) on the global economy. East Asia, the fastest growing region of the world, has so far been the hardest hit by the disease, which Suttle described as “an unambiguous negative to growth”. 

The bank is predicting a hesitant economic recovery in high-income countries, with the US projected to expand 2.5% this year and rising 3.5% in 2004. But these forecasts are subject to downside risks such as a lengthy war in Iraq. 

The euro-zone economy is seen expanding 1.4% this year, rising to 2.6% in 2004, helped by expected rate cuts in the first half of this year. 

“The European Central Bank (ECB) has more room to ease and is likely to follow market expectations and possibly trim rates slightly further in the first half of this year,” the bank said. – Reuters  

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