IMF Scales Back Its Global Outlook, Calls for Europe Rate Cuts

Blaming rapid deterioration in Japan and emerging markets, the International Monetary Fund on Wednesday slashed its 1998 growth projections for the global economy and hinted that Europe should follow the U.S. lead in lowering interest rates to contain the damage.

IMF chief economist Michael Mussa said Japan’s woes and investors’ lack of confidence in developing countries had caused his staff to revise its global growth forecast for this year to 2%, off the 3.1% projection it issued in May and down from the 4% growth recorded last year.

Deepening economic problems are virtually worldwide but most ominous in Japan, where the IMF now sees that nation’s economy shrinking by 2.5% this year. Just four months ago, growth was expected to be nearly flat.

The lowered forecast means the world is likely to produce about $800 billion less in output this year than the IMF was expecting last May.

“It’s as if an economy the size of Canada took the year off,” said Flemming Larsen, IMF deputy director of research.

The IMF’s improved forecast for the U.S. economy was the exception, with the international lending agency now saying the American economy will grow 3.5% this year, or better than the 2.9% forecast in May.

In its report, the IMF cited lower interest rates, declining U.S. debt and rapid employment growth for the improved outlook. But it also warned that it expects the U.S. to slow to just 2% next year.

Lauding the Federal Reserve Board’s decision this week to lower interest rates by one quarter of a point to 5.25%, Mussa said in a news conference at the agency’s annual meeting that European central banks should consider “similar flexibility in their attitude.”

“I would say that’s a nudge for Germany to cut as well before the first of the year,” said Gary Hufbauer, senior fellow at Institute for International Economics here.

The Fed acted to lower rates in part to ease pressure on emerging market countries where rising interest rates have added to mounting debt and deficit woes, which in turn have spurred foreign investors to seek safer havens.

Emerging market rates could follow the Fed down, economists say, especially if other industrialized nations follow the U.S. lead. Just such a coordinated rate cut will be a topic of discussion at the Group of Seven meeting here this weekend.

Lower U.S. rates might indirectly lead not only to “the same directional effect on emerging markets” but could also send capital back to emerging markets in search of more attractive returns, said Lacey Gallagher, a Standard & Poor’s Latin America analyst.

The IMF opens its annual meeting here this week under mounting criticism that restrictive fiscal and monetary policies have tended to worsen economic problems in Asia rather than correct them.

Mussa addressed the criticism obliquely Wednesday by pointing out that the IMF had advocated easing monetary policy or lowering rates in 90% of the countries it had assisted, while pushing for tighter policy in only 10%.