World economy still fragile, warns IMF: Fund predicts UK will scrape into inflation target range and urges against further interest rate cuts

Click to follow
The Independent Online
THE International Monetary Fund warned yesterday that the world economy could quickly slide back into recession unless leading nations co- operate to bolster growth, in spite of encouraging signs in the US and Britain.

In its latest World Economic Outlook, released yesterday, the IMF said prospects remained 'unusually uncertain', although some improvements in output and economic activity should occur this year and in 1994.

For Britain, the report acknowledged that the chances of recovery have been strengthened particularly by the lowering of interest rates and the depreciation of sterling following its withdrawal last year from the exchange rate mechanism of the European Monetary System.

But it warned against any further monetary relaxation, predicting that inflation would touch 4 per cent in 1994, right at the top of the 1 to 4 per cent target range set out by the Government. The fund also advocated early measures to rein in the budget deficit.

Overall, the report, released just ahead of tomorrow's half- yearlyIMF/World Bank meeting in Washington, amounted to a stern reminder of the fragility of the economic upturn and a warning against premature optimism. As such, it also offered a sombre counterpoint to the growing sense of confidence in Britain that the recession is finally over.

'The recovery of global economic activity after the 1991 downturn remains hesitant and uneven. There still appear to be considerable downside risks to the outlook for the next few years,' the report said. It underlined the continuing difficulties of many European countries and Japan.

The IMF repeated the exhortation in successive reports for a rapid conclusion to the stalled Uruguay round of the General Agreement on Tariffs and Trade, as a means toward spurring growth in world trade and guarding against damaging trade disputes.

'If the industrialised countries do not seize the opportunity for effective action, a further deterioration of the economic climate and rising tensions over trade might be difficult to avoid,' the report concluded.

Overall global growth was forecast to strengthen slightly this year to 2.2 per cent from 1.8 per cent in 1992, before picking up further to 3.4 per cent in 1994.

In the US, where the recovery appears to be in full swing, growth is expected to reach 3.2 per cent this year and next. While the IMF offered praise to President Bill Clinton for his economic package, it suggested that his plan to cut the federal deficit by dollars 500bn by 1997 went only half as far as it should.

The fragility of the US recovery was underlined yesterday by Lloyd Bentsen, Mr Clinton's Treasury Secretary, who said he was worried that the economy was growing too slowly to generate new jobs.

On the prospects for Britain, the report warns that sustaining any recovery 'will depend on the authorities' ability to safeguard the credibility of their anti-inflationary commitment'.

For that reason, the IMF advises that 'any further easing of monetary policy in the United Kingdom should be resisted unless there is good reason to believe that a further cut in interest rates would not endanger the goal of containing inflation'.

For the remainder of Europe, the IMF saw economic stagnation this year and strongly urged further interest rate reductions.

----------------------------------------------------------------- PROSPECTS FOR 1993 AND 1994 ----------------------------------------------------------------- GDP Growth Inflation 1993 1994 1993 1994 Canada 3.2 4.4 2.3 2.0 France 0.0 2.3 2.0 2.5 Germany -1.3 1.7 4.4 2.5 Italy 0.3 1.9 5.7 5.2 Japan 1.3 3.5 1.0 1.5 UK 1.4 3.1 2.1 4.0 US 3.2 3.2 3.0 3.1 ----------------------------------------------------------------- Source: IMF -----------------------------------------------------------------

Comments