IMF official: Global economic outlook positive

  • Business
  • Tuesday, 18 May 2004

By C.S. Tan in Bangkok

THE outlook for the global economy is positive, with most economies projected to post firm growth rates, thanks to renewed strength in the US economy, an official of the International Monetary Fund (IMF) said.  

The industrialised countries are forecast to achieve an average growth rate of 3% this year, and emerging economies 6%, said Charles Adams, IMF's assistant director for the Asia-Pacific region.  

The Japanese recovery has been a pleasant surprise, the US economy is growing strongly and the Euro zone is stable. “The G-3, the three main economic engines, looks good,” he added.  

He observed that there was a certain degree of turbulence in the global financial markets as they re-priced stocks in the likelihood that short-term interest rates would be raised.  

The IMF's economic growth projections were made last month, before the oil price surge started.  

Charles Adam

“If the oil price stays at US$40 (a barrel) for some time, it will have an impact on growth,” he said in a briefing for journalists from media members of the Asia News Network here on Friday.  

Data so far, however, point to “the global economy picking up and broadening among countries and sectors, and the US leading the global upturn.” 

Asia, apart from China, will also see rising growth due to the economic expansion in the US.  

The global growth rate today is higher than in recent years. Even so, “there is no significant risk of inflation in the near term, although we are seeing some rise in commodity prices,” Adams said. 

Inflation in the industrialised countries has remained low. In the US, for instance, higher productivity and stable unit labour costs helped contain inflation.  

However, there are significant risks when the IMF looks beyond the next one or two years. There are global imbalances such as the US current account and fiscal (federal government budget) deficits, and global dependence on the US economy.  

Adams, who is based in the IMF's regional office in Tokyo, said he believed the deficits could be reduced in a manageable manner. “The transition is necessary,” he added. Further, the stimulative policies in the US and other countries have also to be unwound.  

In one sense, the US trade deficit is worse than before. In the past, the deficit was financed by equity flows and foreign direct investments.  

“That's now replaced by external purchases of fixed income instruments,” he said.  

Meanwhile, IMF economic counsellor Raghuram Rajan said in a report that the Fund had raised its forecast for average global growth by about 0.5 percentage point, to 4.6% for this year and 4.4% for next year.  

“? if all goes as expected, we are in for the best two-year period in over a decade,” he said.  

The IMF projects the Japanese economy will grow by 3.4% this year – the highest rate since 1996. 

In this rosy picture, there are risks to the short-term outlook, Rajan said. Oil prices will have a negative effect on global growth if they remain at current levels or rise further.  

Every increase of US$5 a barrel, if maintained for a full year, will lower global growth by about 0.3 percentage point.  

A lot depends on what causes higher oil prices, Rajan said. So far, oil price increases have resulted from strong demand, which will not derail economic recovery.  

“What is worrisome is that there is not enough slack in supplies to withstand the withdrawal of a single major producer, which can happen because of geopolitical tensions in the Middle East and elsewhere,” he added. 

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