IMF warns of a global recession

IMF warns of global recession 

Larry Elliott and Charlotte Denny
Thursday September 27, 2001
The Guardian 

The global economy stands on the brink of its first recession in almost 10
years as the devastating impact of the attacks on New York and Washington on
September 11 ripples out from the United States to the rest of the world,
the International Monetary Fund warned last night. 
In an unusually blunt and downbeat assessment of the prospects for the
global economy, the IMF dealt a severe blow to concerted attempts by
policymakers to restore confidence to markets left shattered by the deaths
of more than 6,000 people and the widespread damage to the world's financial
capital. 
The IMF, which even before the events of two weeks ago had cut sharply its
forecasts for growth in both developed and developing countries, said that
the outcome would now be even worse. 
"There is no doubt that the attack is having a negative effect on activity
now in many regions of the globe, and that it has increased what were
already significant risks to the short-term global outlook, including for
emerging economies", said Kenneth Rogoff, the IMF chief economist. 
Evidence of economic and financial distress has accumulated rapidly since
the attacks on the World Trade Centre and the Pentagon. The Dow Jones index
of blue chip US stocks last week suffered its biggest decline since the
Great Depression of the 1930s, while the number of job losses in the airline
industry rose to around 120,000 yesterday with announcement of 13,000 staff
cuts by Delta, America's third biggest carrier. 
Insurance companies are still counting the cost of the tragedy, but believe
it will be at least £15bn. 
Figures from the US this week have shown that consumer confidence has
plummeted in the wake of the terrorist attacks, with the credit ratings
agency, Standard & Poor's, stressing yesterday that the US is already in
recession. 
Mr Rogoff added that it was now unlikely that the world would meet the IMF's
2.6% growth forecast for 2001 and that economic recovery had been put back
by the terrorist outrages. The IMF classifies growth of below 2.5% as a
recession and has spent the past few months revising down its previous
estimates as more and more gloomy news has rolled in. "The implications of
the terrorist attack go well beyond the economic sphere, but it clearly took
place at a difficult time for the global economy," Mr Rogoff said. 
The IMF said that the world could experience a relatively rapid recovery
next year, but only if policymakers took urgent and concerted action to
mitigate the impact of the slowdown by cutting interest rates, safeguarding
public spending plans and pumping money into financial markets to prevent
banks and institutions from bankruptcy. 
Mr Rogoff said at a press conference to launch the IMF's world economic
outlook - its twice-yearly health check for the global economy - that
recession in America was a "done deal", but later sought to retract his
remark. Policymakers in Europe and the US tried to limit the damage from the
IMF report by assuring consumers and investors that the long-term outlook
was good. 
US treasury secretary, Paul O'Neill, said the country's battered economy
would bounce back. "My own view is that the recovery has been slowed by a
quarter or so," he said. 
Meanwhile, Gerhard Schröder, Germany's chancellor, told the parliament in
Berlin: "Terrorists cannot win against the world economy because the basis
for growth and well-being in our country, in Europe and abroad is intact.
There is no reason for pessimism." 
However, the IMF said problems in one economy now tended to have a bigger
impact on the rest of the world as a result of closer financial and trading
ties. "Even prior to September 11, economic developments over the past six
months already pointed to weaker growth in just about every region of the
globe, both this year and next," Mr Rogoff said. 
Japan's economy is expected to contract by 0.5% this year, while growth in
Germany has been reduced to just 0.8%. Along with the rest of the rich west,
Britain has had its IMF growth forecast cut significantly since the spring,
but IMF economists believe it will bounce back more strongly than other
developed nations and will enjoy the fastest growth in the G7 next year. 
The IMF said the government was unlikely to meet its 2.25-2.75% forecast for
growth in 2001, reducing its assessment of UK expansion from 2.6% to 2%.
Treasury officials have now started work on a revised forecast to be
released in November's pre-budget report, but ministers believe the
chancellor, Gordon Brown, is likely to come into line with the IMF. 


MR Doz. Dr. Arno Tausch
EUI 13/EUI 12
BMSG Stubenring 1
A-1010 Wien

Tel. 71100-2272
e-mail: arno.tausch@bmsg.gv.at