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21 April 2004

IMF Forecasts Robust Global Economic Growth in 2004, 2005

Cites geopolitical uncertainties, oil price volatility as major risks

By Andrzej Zwaniecki
Washington File Staff Writer

Washington -- Robust worldwide growth supported by strong international trade, buoyant financial markets and a fast-expanding U.S. economy is projected for 2004 and 2005 by the International Monetary Fund (IMF).

In the most recent edition of its semiannual World Economic Outlook, the IMF forecasts world output growing by 4.6 percent in 2004 -- 0.6 percentage points higher than it projected just half a year ago. In 2005, the global economy is expected to expand 4.4 percent.

"We are up for the best two years in a decade," Raghuram Rajan, the IMF's chief economist, said at an April 21 press briefing on the report.

The U.S. economy is projected to expand by 4.6 percent in 2004 and 3.9 percent in 2005, the report said.

Asia's emerging markets are expected to register the highest growth rates -- 7.4 percent in 2004 and 7.0 percent in 2005, with China propelling the region's surge. The report says, however, that China has begun experiencing problems related to strong growth and that moving to greater exchange flexibility remains in China's interest.

Rajan warned that this move alone will not solve all of China's problems, considering signs of "incipient" overheating -- a term referring to an economy expanding so fast that economists fear a rise in inflation.

The IMF praised Japan for engineering a recovery that "substantially exceeds expectations" but said it is not sure whether this recovery can be sustained.

Europe is the only region where IMF's expectations are subdued. The report's growth projections for countries of the euro zone are 1.7 percent in 2004 and 2.3 percent in 2005.

As for global risks, the IMF said that geopolitical uncertainties and high oil prices have become increasing concerns.

Rajan said that the Organization of Petroleum Exporting Countries (OPEC) is committed, "by and large," to preventing major supply disruptions. But the IMF is somewhat concerned by OPEC's relative lack of unused oil production capacity that may constrain its ability to make up shortages, he said.

The IMF cited major challenges for international policy makers: achieving an orderly resolution of global imbalances (the large U.S. current account deficit and surpluses elsewhere), addressing difficult medium-term fiscal situations in many countries, and managing the eventual transition to higher global interest rates.

Rajan cautioned that, since the beginning of the economic slowdown and the September 11, 2001, terrorist attacks, world leaders have nearly exhausted their policy options for stimulating national economies and making them more resilient, leaving the world with "limited insurance against global shocks."

The IMF said that policy-makers need to find ways to deal with unexpected shocks and that central banks need to prepare world economies for higher interest rates.

The report said U.S. fiscal policy may run the risk of hampering U.S. and global growth in the long run. Although the U.S. willingness to run a large budget deficit has provided important support to the global recovery, it said, in the long run deficits may diminish the level of savings, push up interest rates and crowd out private investment.

The IMF called the Bush administration's plan to halve the deficit over the next five years an "important first" step in the right direction but added that "credible measures to achieve this reduction have yet to be put in place."

The World Economic Outlook can be viewed at http://www.imf.org/external/pubs/ft/weo/2004/01/index.htm

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