Asian crisis still dangerous, IMF warns

Asian crisis still dangerous, IMF warns

By Alex Brummer

WASHINGTON: The crisis in Asia is far from over and may pose a
further threat to global growth according to the IMF's World
Economic Outlook report published Monday.

The troubles in East Asia, exacerbated by the uncertainties
over Japan's economy, have forced the IMF to downgrade its
forecast for global growth this year to 3 percent, against the
3.5 percent it predicted in December and the 4.5 percent
expansion projected in the autumn.

This confirms the IMF has consistently underestimated the
impact of the crisis in Asia which has had a dampening effect on
output and trade in both the industrial and developing countries.

The biggest downward revisions have been seen in Indonesia,
South Korea and Thailand where Fund economists report "the drying
up of private foreign financing together with the large currency
depreciations and declines in asset prices are causing sharp
contractions in domestic demand". It has cut its growth forecast
for Asia's newly industrialized countries by 4.2 percent to just
1.8 percent.

On Monday IMF chief economist Michael Mussa warned of a
possible further decline in output from Indonesia, South Korea
and Thailand. He is also worried about India -- where the budget
deficit is uncomfortably high -- and China, where the IMF expects
growth to fall to 7 percent in 1998. But the Fund is predicting
an Asian bounce-back next year.

The IMF has also cut growth projections for 1998 in the
industrial world by 0.5 percent to 2.4 percent. However, British
growth is still seen at 2.3 percent, a more benign prediction
than that from the OECD in Paris in early April.

The biggest potential problem for the industrialized nations
is Japan. Fund staff argue that although Japan's downturn (it
will be in recession for the first half of this year) has been
exacerbated by the Asian crisis, many of its problems are
"homegrown". They point to the financial sector, notably the bad
loans its banking system; the delays in reform to restructure the
economy and the decision to remove fiscal stimulus last year when
the economy was too fragile.

While the IMF has hopes that a new package of tax cuts and
public spending may help to improve Japan's economy in the second
half of this year, it fears recovery could be impeded in 1999 by
fiscal tightening and urges Japan to introduce further measures.

Among the rest of the richest G-7 economies, growth has been
sustained by recovery in Western Europe and robust growth in the
Anglo-Saxon economies of the U.S., Canada and Britain. In Germany
output will increase from 2.5 percent to 2.8 percent and
expansion in France will be even stronger. But Germany's higher
output could also bring a steady increase in Bundesbank/European
central bank interest rates, with German market rates seen as
rising from 3.4 percent to 3.9 percent by the end of 1998 and to
4.5 percent in 1999 as the authorities move against overheating.

The Fund still has serious concerns about monetary union,
particularly the lack of flexibility in labor markets. It fears
that Europe, without the ability to adjust exchange rates after
EMU, could face even higher unemployment unless it tackles the
labor market problems.

The IMF also seems more cautious about the U.S. economy. It
notes that the consequences of the strong dollar together with
the Asian crisis will lead to a swelling of the current account
deficit to US$230 billion this year, some 2.75 percent of gross
domestic product.

This, together with the strength of asset prices in the U.S.
economy, with the Dow Jones in the region of the 8000 mark, may
lead the Federal Reserve to raise interest rates.

Mussa suggested that the world economy could tolerate a
correction of 20 percent in the U.S. stock markets without much
real impact -- although a fall of 50 percent would be a different
matter.

The Asian crisis also is taking its toll in Latin America
where the Fund estimates that it has wiped out 1.5 percent of
expansion this year, although output will still be up by 3.4
percent.

-- Guardian News Service