Eurozone will have to 'watch recovery on TV'

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The Independent Online

Europeans hoping for an economic recovery will have to "watch it on TV" as the eurozone is left behind in a global recovery expected this year and next, the International Monetary Fund said yesterday.

The IMF left its global forecasts unchanged at 3.2 and 4.1 per cent for this year and next but said the overall figure masked a huge divergence in fortunes between Europe and the United States, which was "just charging ahead".

Kenneth Rogoff, the IMF's chief economist, said: "In the US and emerging Asia the only question is how long the rebound can be sustained, whereas Europe is still struggling to turn the corner.

"For the moment, most Europeans who want to see an economic recovery will have to watch it on TV."

He issued a veiled hint to the European Central Bank saying he would "have no complaint" if they cut interest rates especially if the euro's exchange rate continued to rise. The Fund slashed its outlook for the 12-nation zone, forecasting growth of just 0.5 per cent this year - less than half its April forecast of 1.1 per cent - and by 1.9 per cent in 2004. "Weak consumer confidence and fragile corporate balance sheets are leading problems," Mr Rogoff said.

But the message from the IMF's overall forecast was the most upbeat assessment of the global situation since the peak of the boom in the 1990s. "For the first time in what seems like a very long time, we are reasonably optimistic about seeing a return to normal growth in the global economy, or perhaps even better," Mr Rogoff said.

It increased its forecasts for the US this year to 2.6 from 2.2 per cent and for next year by 0.3 percentage points to 3.9 per cent, close to the Bush administration's prediction of above 4 per cent growth in 2004. "Right now the US is just charging ahead," Mr Rogoff said. "The United States has the best recovery that money can buy... but this comes at the cost of mortgaging growth further down the road."

He warned the recovery could still be derailed by a shock such as a sudden unwinding of the US's huge twin fiscal and current account deficits that would trigger a collapse in the value of the dollar.

He warned that the US current account deficit, which was forecast to running at around 4 per cent of GDP for at least the next five years, would "some day" have to unwind. "When it does there will be a sharp drop in the dollar," Mr Rogoff said.

He also warned that the "lion's share" of the impact would fall on the euro, making life even tougher for its exporters, unless Asian countries such as China loosened their currency regimes.

The US has led a chorus of criticism of China's fixed exchange rate, saying the yuan's artificially low exchange rate was adding to the imbalances.

"I would sum it up by saying it is bad enough that the global economy has been flying on one engine but it is going to be a lot worse if it has to land on one wheel," Mr Rogoff added.

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