World Economic Outlook: Forceful Coordinated Response Needed to Put Global Economy Back on Sustained Growth Path

• Pages: 334-336

Page 334

International economic and financial conditions have deteriorated considerably in recent months as recessions have deepened in many Asian emerging market economies and Japan and as Russia's financial crisis- erupting in August 1998-has raised the specter of default. Negative spillovers have infected world stock markets, widened emerging market interest spreads, put acute pressures on several currencies, and forced further drops in already weak commodity prices. Even among the hitherto relatively immune industrial countries of North America and Europe, the effects of the crisis on economic activity are beginning to be felt.

Taking account of these developments, the October 1998 edition of the World Economic Outlook-the IMF staff's twice-yearly survey of global economic prospects and policies-has revised its projections for world growth downward from its last assessment in May 1998. Two years of growth significantly below trend are now projected for 1998-99, and the risks of a deeper, wider, and more prolonged downturn have escalated. At a press briefing on September 30, Michael Mussa, IMF Economic Counsellor and Director of the Research Department, said the IMF study is not projecting a global recession-defined as world GDP growth of 1 percent or less. But, he cautioned, such an outcome is a "risk with which policymakers around the world need to be concerned."

Growth Projections Revised Downward

At the press briefing, Mussa said that world GDP growth in 1998 is now expected to reach only 2 percent, versus 3.1 percent as forecast last May. The main reason for the revised projection, he said, is the downturn in Asia-including Japan-which has turned out to be significantly deeper and more widespread than expected by IMF staff or most other analysts just five months ago. For 1999, the staff's downward revision of projected world growth is also larger-from 3.7 percent in May to 2.5 percent. Even around this revised forecast, Mussa said, the balance of risk remains significantly on the downside, especially if the current reduced levels of private financing flows to virtually all emerging market economies persist for an extended period.

There are some hopeful signs on the horizon, Mussa said. Comparing forecast growth for 1999 with the likely outcome for 1998, several Asian economies that are suffering substantial output declines this year should be able to stabilize or perhaps stage modest recoveries next year. In Korea and Thailand, the significant easing of monetary policy since early 1998, made possible by the restoration of reasonable exchange rate stability, will aid recovery, along with dramatic improvements in external positions. Expanding fiscal deficits, reflecting weak activity and the strengthening of social safety nets, will help support consumption in all of the key crisis economies. In China-far and away the largest emerging market economy in East Asia- growth next year will be supported by the stimulus provided by the substantial easing of monetary policy in recent months and by large public works spending. Nevertheless, growth is expected to...