US deficit threatens world prosperity, says IMF

The record US trade deficit is the greatest threat to continuing world prosperity, according to a report from the International Monetary Fund.

The IMF is worried about the growing imbalance in trade between the major economic zones, according to a version of its World Economic Outlook, which was posted on the Dutch finance ministry website yesterday.

The comments were made public as official figures confirmed that Americans continued to shop with a frenzy in February, driving the savings ratio to an all-time low.

The summary of the WEO said: "The IMF still sees as the greatest risk the substantial current account imbalances among the large economic regions. Specifically, the high deficit on the current account in the US raises concerns."

The US trade deficit in goods, services and investments widened to a record $99.8bn in the fourth quarter of 1999 and a record $339bn for the full year as imports grew faster than exports.

Overall, the IMF said prospects for the world economy showed continued improvement in the past six months. The US and European economies continued to show strong growth while there were signs of a recovery in Japan although it is slower than expected, it said.

Some other Asian countries showed a significant recovery in 1999 from the economic crisis of 1997 and 1998, the summary said, and recession in Latin America was less deep than expected.

It is the second time the Dutch ministry has released details of the IMF's outlook, which this year is due to be published on 12 April in Washington.

Meanwhile, figures from the US Commerce Department showed consumer spending rose a stronger-than-expected 1 per cent in February despite a fall in the rate of income growth to 0.4 per cent.

With spending outpacing income growth, savings amounted to just 0.8 per cent of disposable income, it said. That was down sharply from January's 1.4 per cent and left personal savings at an all-time low.

Economists fear that if the economy dips into recession, the low savings rate could exacerbate problems because many households would be left without cash to fall back on.

The data was the latest indication that five interest rate hikes by the Federal Reserve since last June have yet to tame the rapidly growing economy, which is booming thanks to low unemployment, high consumer confidence and increased wealth from stock market and home equity gains.

In its latest global economic outlook, Deutsche Bank warned that the risks to the global economy were centred on the imbalances in the American economy.

Peter Cooper, co-head of global economics, said: "The imbalances in the US economy that heighten the chances of a sharp correction include an overvalued stock market, the extremely low household savings rate, the tight labour market and the external deficit that is now in the range that has in the past set off major corrections."