IMF sees lower global growth.  On 26 April, the International Monetary Fund (IMF) published its World Economic Outlook (WEO), which assesses the current developments in the global economy and the growth prospects for this year and 2002.  According to the IMF, the prospects for global economic growth have weakened significantly since the publication of the WEO in October 2000, when the IMF projected global output growth for this year at 4.2%.  The IMF has cut the forecast for world economic growth this year a full percentage point to 3.2%.  The downward adjustment was prompted by a marked slowdown in the United States, a stalling recovery in Japan, as well as moderating growth in Europe and in a number of emerging market countries. 

IMF optimistic for Latin America.  For the United States, growth this year has been revised downward by 1.7 percentage points from the October 2000 forecast to 1.5%.  This is down from virtually 5% growth last year and represents the lowest expansion level for a decade.  The IMF believes the slowdown will be short-lived given the rapid policy response by the U.S. Federal Reserve and owing to the fact that a number of other central banks still have considerable room for monetary policy adjustments.  However, the IMF expects economic sluggishness to persist into the second half of this year and thus has reduced the projection for year-over-year growth for the United States in 2002 to 2.5%.  In the Euro area, activity is seen reasonably robust this year at 2.4% and firming to 2.8% next year.  However, this year’s forecast represents a full percentage point cut compared to the IMF’s expectations last October.  In Japan, the situation is more worrying and growth is projected to fall to 0.6% from 1.7% last year.  Moreover, Japanese growth for next year is projected to reach only 1.5%.  According to the IMF, Latin America will feel the effects of the pronounced U.S. economic slowdown.  However, the cutbacks in the growth forecast for the region in 2001 have been limited to a relatively moderate 0.8 percentage point cut from October last year to 3.7%.  This is well above the current Consensus Forecast of 3.2% growth.  In 2002, the difference between the IMF and the Consensus forecast is less pronounced with 4.4% and 4.2% growth expected respectively.

Considerable downside risks seen in exchange rate imbalances.  The baseline scenario underlying the WEO forecast assumes that after a significant slowdown in global activity in 2001, growth rebounds back to close to its potential in 2002 and is broadly stable subsequently.  However, the IMF sees considerable risks for a deeper and more prolonged downturn, which it accounts for in a “hard landing” scenario.  According to the IMF, exchange rates between the US$ and the Euro and Yen appear different from the values implied by medium-term fundamentals, which is causing significant trade imbalances.  The “harder landing” scenario assumes an abrupt adjustment of exchange rate imbalances some time in early to mid-2001 (a fall in the real value of the US$ of 20% against the Euro and yen, and 15% percent against currencies of other industrial countries), with associated reductions in confidence and equity market valuations.  The industrialized countries would experience the hardest impact on economic growth amid sharp declines in investors’ and consumers’ confidence levels whereas developing countries would be far less affected.  The “soft landing” scenario assumes the adjustment of imbalances in the currency and stock markets may also occur gradually over the next three years.  The United States is actually seen as profiting under this scenario and the growth impact in Japan and the Euro area is expected to be less than half a percentage point.  In developing countries such an adjustment would be hardly felt.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing for Latin America.  For more details please click here.

For five-year forecasts, please click here.