World Economic Outlook, Capital Markets Update : Growth Projections for 1999 Revised Downward, But Global Economic Situation Is Stabilizing

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In view of the significant events affecting world capital markets and the global economy during much of August-November 1998, the IMF staff's projections for world growth in 1999 have been revised downward-although not substantially-to 2 1/4 per-cent in 1999 from the projections in the October 1998 World Economic Outlook of 2Vi percent in 1999. (For 1998, the estimated growth has been revised up slightly.) These new projections, con-tained in an interim joint update of the IMF's latest regular reports on the World Economic Outlook (see IMF Survey, October 19, 1998, page 305) and International Capital Markets (see IMF Survey, September 28,1998, page 290), underscore the continuing costs of the Asian crisis, its repercussions, and the crises that afflicted financial markets in 1998.

Describing the revised projections in a press briefing held on December 21, Michael Mussa,

IMF Economic Counsellor and Director of the Research Department, said that the most serious downside risks to the global economy Page 2 that emerged as a result of the turbulence in global financial markets now seem to have subsided, and the relatively modest scale of the down-ward revisions to the global growth outlook since early September suggests that the situation may have begun to stabilize.

In addition to reassessing and updating the World Economic Outlook, the interim assessment sheds light on the sources and nature of the turbulence experienced in both mature and emerging financial markets and seeks to identify critical shortcomings in private and public risk-management systems.

Flemming Larsen. We certainly do not believe that we are completely out of the woods.

Projections and Risks

The effective devaluation and unilateral debt restructuring an-nounced by Russia in mid-August triggered a series of sharp market corrections, Mussa explained at the press briefing. The tension and turbulence that developed in several financial markets initially forced a widening of interest rate spreads and cut off new credit flows to emerging market borrowers.

The turbulence then spread to the deepest and most liquid of the world's financial markets, producing sharp declines in industrial country equity prices, unusual volatility in the yields of highest-grade gov-ernment debt, a general rush to safety and a drying up of liquidity, and sharp movements in key exchange rates. These developments, Mussa said, led the IMF staff to further revise their projections for world growth downward.

Revisions to World Growth Projections

World Economic Outlook	1997	1998	1999	2000
October 1997	4.2	4.3	4.4	4.6
December 1997	4.1	3.5	4.1	4.4
May 1998	4.1	3.1	3.7	3.8
October 1998	4.1	2.0	2.5	3.7
December 1998	4.2	2.2	2.2	3.5

Data: World Economic Outlook and International Capital Markets: Interim Assessment, December 1998

The interim assessment suggests that, despite the downward revisions in growth projections, the danger of a worldwide recession appears to have diminished. Conditions in financial markets have calmed down since early October, Mussa said, thanks in...