November 15, 2001

Economy

IMF Lowers Economic Forecasts,
Citing Effects of Terrorist Attacks

Associated Press

WASHINGTON -- The International Monetary Fund, updating its economic forecast to reflect effects of the Sept. 11 terrorist attacks, significantly lowered its estimate for growth in the U.S. next year.

The IMF said it still expects an economic rebound in the world's largest economy but it slashed growth for the entire year to just 0.7% from its previous estimate of 2.2% growth. That would be the weakest performance since the end of the last recession in 1991.

IMF Managing Director Horst Koehler said it is crucial for Congress and the Bush administration to agree quickly on the shape of an additional stimulus plan. "The ongoing discussion is not something which is confidence-building," he told reporters at a briefing on the revised economic forecast.

Treasury Secretary Paul O'Neill, in a separate briefing Thursday, said he didn't believe the revised 0.7% growth rate was a reasonable forecast.

"I'm convinced that the U.S. economy is putting down the basis for a return to a good rate for real growth as we move into next year," Mr. O'Neill said. "I think when the scorekeeping is done for next year, Horst Koehler will owe me a dinner, probably a very big one," he said.

Still, Mr. O'Neill stressed the importance for Congress to quickly pass an economic stimulus package. "We need a stimulus package. We need it now," he said.

Earlier Thursday, the Labor Department reported that initial jobless claims fell slightly last week, surprising economists who had expected a sharp rise. But the overall number of people drawing unemployment benefits continued to increase, indicating that the labor market remains weak.

The IMF also dramatically cut its forecast for Japan, the world's second-largest economy, predicting it would contract by 1.3% following a drop of 0.9% this year. In October, the IMF had forecast a milder slump in Japan with the economy expected to fall by 0.5% this year but posting slightly positive growth of 0.2% in 2002.

With the significant reductions in growth prospects in the world's two biggest economies, the IMF lowered its expectations for global growth to 2.4% for this year and next year.

Many economists believe that any global growth figure below 2.5% constitutes a worldwide recession, given that increased economic output is not sufficient to handle an expanding population. Last month, the IMF had put global growth at 2.6% for this year and 3.5% for 2002.

However, Mr. Koehler told reporters that the IMF did not believe its new forecast constituted a global recession. He said the expectation was for a less severe slowdown globally than during past recessions in the U.S. in 1990-91 and the early 1980s.

"The situation is clearly difficult, but it is manageable and we continue to expect a recovery next year," Mr. Koehler said.

The new growth forecast was prepared for meetings this weekend in Ottawa of the policy-setting committees of both the 183-nation IMF and its sister lending institution, the World Bank.

The U.S. economy dipped into negative territory in the July-September quarter, declining at an annual rate of 0.4%. Many analysts believe the contraction is accelerating in the current quarter.

The National Association for Business Economics released an updated forecast Wednesday projecting a fall in the gross domestic product at an annual rate of 2% in the October-December period.

For all of 2001, the NABE forecast U.S. growth at 1.1%, the same estimate the IMF made in its new forecast. The IMF previously predicted 1.3% growth in 2001. However, the NABE is slightly more optimistic about next year, projecting U.S. growth of 1.3%, compared with the IMF's forecast of 0.7% growth.

For the European Union, the IMF projected growth this year of 1.7% and next year 1.4%. That represented slight downward revisions from 1.8% for 2001 and 2.2% for next year that the IMF had forecast in October.

Mr. Koehler applauded the decision by the European Central Bank to cut interest rates last week to deal with weakening economies in Europe. He also said Japan needs to inject more money into its financial system to counter deflationary forces and he urged the EU to tackle structural problems including accelerating reforms in labor markets.

Efforts to deal with the weakening global economy will be a primary topic when finance ministers gather in Ottawa for talks Friday through Sunday. Mr. Koehler said the IMF is ready to help individual countries get through the current troubles.

He said the IMF is preparing to bolster its financial assistance package for Turkey, saying the executive board would discuss Turkey later on Thursday.

On Argentina, which is struggling to avoid default on $132 billion in foreign debt, Mr. Koehler said it is critically important for Latin America's third-largest economy to continue pursuing economic reforms and talks with its creditors.

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