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IMF Predicts Slow World Economic Growth in 1992 and 1993

September 16, 1992

WASHINGTON (AP) _ The International Monetary Fund said Wednesday that the world economy, having suffered through its worst year in nearly a decade, was poised to resume moderate growth in 1992 and 1993 although at lower rates than the agency had predicted.

But the IMF cautioned that even its scaled-down forecast could be jeopardized by any one of several economic threats ranging from currency market turmoil to failure of U.S. policymakers to control the federal deficit.

The IMF said the world economy was showing signs of revival this year after 1991, when world output had slipped to a barely perceptible 0.1 percent, the worst showing since the global recession year of 1982.

In its new ″World Economic Outlook,″ however, the IMF trimmed its growth forecast for this year to 1.1 percent from the 1.4 percent estimate of just five months ago.

For 1993, the IMF projected that world growth would rebound to 3.1 percent, one-half percentage point less than an April estimate that put growth next year at 3.6 percent.

The agency said the overwhelming majority of risks to the forecast were negative.

Fleming Larsen, director of the IMF’s forecasting project, said world growth prospects were being harmed by a ″crisis of confidence″ among consumers and businesses that their elected leaders will fail to deal with such problems as the U.S. budget deficit or European interest rates and currency values.

European officials struggled Wednesday to cope with a currency crisis that forced Britain to sharply raise interest rates to defend its currency. Michael Mussa, the IMF’s chief economist, said he did not think the monetary turmoil would prove to be longlasting and therefore would not adversely affect the economic outlook.

But C. Fred Bergsten, head of the Institute for International Economics, a Washington think-tank, disagreed with this assessment and said he believed the IMF’s new forecast greatly overestimated the potential for world growth next year.

″They are living in a fantasy land with a forecast for world growth over 3 percent,″ he said. ″We see much slower growth with the chance it won’t even creep above 2 percent.″

The 159-nation international lending organization aimed very pointed criticism at the United States, saying that the global outlook could be jeopardized by continued failure to deal with the U.S. budget deficit, which was blamed for slowing world growth by siphoning off scarce capital and keeping interest rates higher than they otherwise would be.

″A determined new effort to reduce the federal budget deficit is urgently required as a necessary condition for a more satisfactory economic performance,″ the IMF said.

The IMF’s economic outlook was released in advance of a Saturday gathering of finance officials of the world’s seven richest countries - the United States, Japan, Germany, Britain, France, Canada and Italy - and the annual meetings next week of the 169-nation IMF and its sister lending organization, the World Bank.

Those meetings are expected to be preoccupied with ways to calm nervous financial markets, boost the prospects for world growth and coordinate economic assistance to Russia and the other former Soviet republics.

The IMF continued to forecast bleak times for the former Soviet Union, predicting that output will plunge by 18.2 percent this year after a 9 percent drop in 1991. It said the economic contraction will continue into 1993 as well, with a drop of 6.5 percent forecast.

Declines of this magnitude would surpass the roughly 25 percent drop in output experienced by the United States and many European countries in the Great Depression of the 1930s.

Wilfried Thalwitz, a World Bank vice president, told reporters Wednesday that he believed even with massive amounts of Western assistance, it would probably take until the turn of the century for the former communist countries to get back to the output levels they had achieved before launching their free-market reform programs.

The IMF’s outlook forecast that the U.S. economy would grow by 1.9 percent this year and 3.1 percent in 1993 after contracting 1.2 percent in 1991.

The study estimated 1993 growth rates of 3.8 percent in Japan; 2.6 percent in Germany and 2.9 percent for the industrial world as whole. By contrast, it said developing countries would enjoy growth of 6.2 percent next year.

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