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.