Crisis has modest effect on world growth: IMF
Crisis has modest effect on world growth: IMF
HONG KONG (Reuters): The International Monetary Fund said on Monday it remained convinced Asia's crisis would only modestly hurt the global economy, despite charges by some observers that it was too optimistic on world growth.
The agency also said it saw more scope for growth in Japan following the government's unveiling of a fiscal package.
"On the global level, we expect this crisis to cause only a relatively small recession at the world level," Flemming Larsen, deputy director of the IMF's research department, told a gathering of business executives in Hong Kong.
He also said the depth of the global economic slowdown would be of "quite a different magnitude" than the world slowdowns of the past quarter century.
In its World Economic Outlook released on April 13, the IMF said it expected world output to grow 3.1 percent in 1998 and 3.7 percent in 1999 compared with 4.1 percent in 1997.
Growth in the advanced economies was projected to decline to 2.4 percent in 1998 from 3.0 percent in 1997 and then rise to 2.5 percent in 1999.
The IMF had forecast zero growth for Japan, but had become more optimistic after the government's recent revealing of a 16.65 trillion yen (US$126 billion) fiscal stimulus package.
"With the package, we are now more optimistic that Japan will not contract," said Larsen. He said growth might even be "modestly positive" in 1998.
But he said that while the package would help boost demand in the short-run, Japan needed to do more to reform the structure of its economy.
Economies of the ASEAN-4 -- Indonesia, Thailand, Malaysia and the Philippines -- were seen contracting 2.7 percent in 1998 from 3.9 percent growth in 1997 before slowly recovering as the century closed.
But while the outlook for Southeast Asia was poor, the world picture "had not changed much," largely because of continued strong growth in the United States and Canada and increasing strength in continental Europe, Larsen said.
Larsen said the IMF was not "completely opposed" to arguments that diminished import demand in Asia could have negative effects on the growth in the developed world.
But he said the substantial reallocation of investment funds from Asia to the United States and Europe that has boosted those countries' stock markets and spurred a global fall in interest rates was offsetting the trade effects of a weakened Asia.
"The financial reallocation effect is providing a very powerful offset," he said.
Larsen acknowledged there was merit to concerns expressed by some observers that developed nations had become too complacent about inflation on views the downturn in Asia would mitigate price pressures in their economies.
But he also said "we may well be looking at a tightening in the U.S. and Europe in the next six months."
But the IMF did not foresee a sharp monetary tightening in the U.S. to stave off inflation. Rather it expected -- and hoped -- the country would experience a soft landing.
Turning to exchange rates, Larsen said the strength of the dollar and weakness in the yen largely reflected cyclical factors that would reverse in time.
"The U.S. dollar is clearly above its medium-term trading range," Larsen said, adding that would contribute to the U.S. current account deficit widening to $230 billion to $240 billion in 1998.
The gap was around US$166 billion in 1997.
The fall in the yen "probably exceeds what is appropriate for the medium-term, but it reflects cyclical factors in the Japanese economy," he said.
The dollar was trading at 132.75 yen in late Asian activity.