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IMF trims 1996 world

growth forecast

WASHINGTON: The International Monetary Fund said on Wednesday that it has shaved its forecast for world economic growth this year as a slowdown has spread through Europe, but added it sees better times ahead in 1997.

In its semi-annual World Economic Outlook, the IMF said subdued global inflation, low long-term interest rates, buoyant stock prices and a stronger dollar all point to "relatively solid" world economic growth in the months ahead.

"Overall, there do not seem to be grounds to expect a prolonged or generalized slowdown, and global growth is projected to pick up," it said.

The IMF expects the world economy to grow by 3.8 percent this year. That is faster than last year's pace of 3.5 percent but slower than the 4.1 percent growth rate projected by the Fund for 1996 last October.

Growth is forecast to pick up to 4.3 percent in 1997.

Much of the expected sub-par performance of the world economy this year is blamed on a slowdown in Europe, particularly in Germany, France and other countries whose currencies are closely linked to the German mark.

The IMF expects Germany's economy to grow by a mere one percent this year, and France's, 1.3 percent. Growth in 1997 is expected to pick up, to 2.9 and 2.8 percent, respectively.

The Fund sees room for further reductions in interest rates by those countries to spur growth and offset the drag on their economies from budget cuts as they strive to meet the tough criteria for entry into the European Monetary Union.

The slowdown has raised questions about the ability of Germany, France and others to meet the budget-cutting requirements for the launch of EMU starting in 1999.

The IMF though argued that the EMU fiscal targets were feasible, provided economic growth picks up as expected. But it admitted it won't be easy. "Qualification by a sufficiently large number of countries is by no means assured," it said.

It suggested that some of the fiscal targets might be interpreted liberally, perhaps by foscussing on structural, rather than actual, budget deficits, to ensure the EMU launch.

European countries whose currencies are not linked to the mark have performed better than Germany and France, partly because the weakness of their exchange rates has boosted their exports by making them more competitive on world markets.

They include Britain, where growth is expected to be 2.2 percent this year and 2.7 percent next, and Italy, with growth of 2.4 percent in 1996 and 2.7 percent in 1997.

The IMF though had some words of warning for both nations, saying it saw room for little, if any, further cuts in British interest rates, while calling Italy's recovery "unbalanced."

It also suggested there was some scope for an appreciation of the British pound and the Italian lira. In contrast to the mixed picture it sees in Europe, the IMF forecast steady US growth in the period ahead -- 1.8 percent this year and 2.2 percent next, after two percent in 1995. While US long-term interest rates have recently climbed, they remain well below levels seen in early 1995, it said.

The Fund though warned of a "significant risk" to the US expansion if the Clinton administration and Congress fail to reach an agreement to balance the federal government budget.

The IMF gave an upbeat assessment of the outlook for the Japanese economy after years of a virtual recession. The Fund expects Japanese growth of 2.7 percent this year and 3.1 percent next, compared with just 0.9 percent in 1995.

The Japanese economy has been aided by a steep fall in the value of the yen, after its rise to record levels a year ago.

"Exchange rate movements ... have brought the currencies of the three major countries (the United States, Japan and Germany) into better alignment, relative to fundamentals," the IMF said. "The correction of the overshooting of the yen has been particularly helpful," it added.

Japan's economy has also been aided by sharp cuts in short-term interest rates. The IMF said though that those will need to be raised once the recovery is well established.

The Fund also saw brighter times ahead for Canada, with growth accelerating to 2.9 percent in 1997 from 1.9 percent in 1996 and 2.2 percent in 1995. Canada has "some flexibility" to cut interest rates further if needed to boost growth.-Reuter