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