Golly

["Ian Murray" <seamus2001@xxxxxxxx>]

[FT]

IMF warns of a significant danger of global recession
By Ed Crooks in London, Peronet Despeignes in Washington and David
Ibison in Tokyo
Published: August 30 2001 19:43GMT | Last Updated: August 31 2001
01:39GMT



Economists at the International Monetary Fund have warned of a
"significant danger" of a global recession along the lines of the
early 1980s and early 1990s.

A leaked draft version of the IMF's World Economic Outlook, obtained
by Financial Times Deutschland, predicts the world economy will grow
by 2.8 per cent this year but states that there could be "a much
deeper and more protracted global downturn".

The IMF economists' comments emerged as economic news from around the
world gave investors and analysts fresh reasons for concern.

US government figures pointed to a sharp slowdown in consumer
spending, while in Japan a decline in industrial output, weak retail
sales figures and a round of job cuts reinforced a growing expectation
that the country was poised to fall into recession.

The focus of the IMF's concern is the outlook for the US. Although the
IMF forecasters have not changed the prediction made in April that the
US will grow by 1.5 per cent this year and 2.5 per cent next year -
roughly in line with the US administration's expectations - they see a
serious risk of a much worse outcome.

If US productivity growth is less than expected, then stock markets
could fall, triggering sharp declines in business investment and
private consumption. That would cause a global recession, and possibly
"substantial financial market turbulence", including "a possible
abrupt decline in the value of the dollar".

The impact of global recession and market turbulence might be
particularly severe for developing countries, the IMF economists note.

Fresh evidence that the IMF's fears might be realised was released in
the US on Thursday, as official figures showed the savings rate jumped
to a two-year high in July. The news strengthened fears of a sharp
slowdown in the consumer spending that has been the principal support
for the US economy this year.

The commerce department said consumer spending grew only 0.1 per cent,
its slowest pace since October, even though personal income rose by
0.5 per cent.

The figures were a sign that nervous US consumers were unwilling to
spend the proceeds of the tax cut enacted by the Bush administration.

Separately, the US labour department said the number of Americans who
continued to receive unemployment benefit rose to 3.17m - its highest
level in nearly nine years.

The IMF's economists argue that the impact of a US recession on the
world economy would be made more severe by the weakness of the
economies of Japan and Europe.

Official figures from Japan on Thursday confirmed that weakness.
Industrial production fell 2.7 per cent in July, outpacing earlier
forecasts and the fifth consecutive monthly decline. Retail sales for
the month also dropped 2.7 per cent, their fourth back-to-back monthly
drop. The news helped push Japan's Nikkei 225 benchmark stock market
index even further below the key 11,000 level on Thursday to a 17-year
low of 10,938.

Meanwhile Kyocera, an electronics company, said it would reduce its
overseas workforce by 10,000 by the end of the year, while Oki, a
telecommunications company, said it was aiming for a 10 per cent
reduction in its workforce.

In the draft World Economic Outlook, the IMF economists say they
believe it is "likely" that the Japanese economy has slipped back into
recession. They forecast the economy will shrink by 0.2 per cent this
year, before growing by just 0.6 per cent next year.

The IMF economists call on Japan to loosen monetary policy "move
aggressively", even if this leads to a further fall in the yen, and
not to move too rapidly to tighten fiscal policy.

The point is also made by some US economists, who contend the US
should focus for now on additional measures to revive growth - rather
than on shoring up its shrinking federal budget surplus.

The World Economic Outlook is to be published ahead of the IMF's
annual meetings at the end of next month. It may be revised after it
is discussed by the IMF's executive directors next week but is
unlikely to be substantially changed.