The International Monetary Fund revised its global growth forecast down for the second time in four months yesterday as Asia's rumbling economic crisis took its toll on prospects around the world.
The IMF's World Economic Outlook report, a summary of economic strengths and weaknesses in IMF member states, said world growth would slow to 3.1 per cent this year, from 4.1 per cent in 1997.
But growth would recover to 3.7 per cent in 1999, pointing to a less severe slowdown than in previous downturns in the last two decades.
"Risks are about evenly balanced around the world growth forecast," the IMF chief economist, Mr Michael Mussa, told a news conference introducing the closely-watched report.
"We may have upside potential for North America and Continental Europe, but there is some downside risk in Asia and a number of other developing countries heavily dependent on commodity exports."
The previous IMF forecast, released last December, said the world economy would grow by 3.5 per cent. That was a downward revision from an October forecast of growth of 4.3 per cent.
The latest report said Asia's problems would encourage industrialised economies to keep monetary policy relatively loose, but policy-makers had to watch inflationary pressures.
The IMF report, written before Japan announced a new stimulus package of tax cuts and public spending, projected zero Japanese growth this year, down from 0.9 per cent in 1997, although Mr Mussa expected negative growth in the first half.
"The fiscal stimulus offers some reasonable hope that in the second half there will be some resumption of positive growth," he said of the world's second-largest economy.
But the IMF said there was little risk of global deflation, because conditions were considerably different from those during the Great Depression of 1929-33.
Even if the slowdown in global growth accelerated more than expected, it said central banks would have ample scope to lower interest rates to prevent deflation, which occurs when the general price level declines over a prolonged period.
"Fortunately growth in North America and western Europe has been well sustained and appears likely to remain so in the period ahead," the IMF said, noting that domestic demand was robust in the United States, Canada and the United Kingdom and was strengthening in much of continental Europe.
"The Asian crisis is likely to exert a moderate contractionary and disinflationary effect on the industrial, as on other economies, thus reducing the risk of overheating in those countries operating at high levels of resource utilisation, in particular the United States."
The IMF forecast 2.9 per cent growth in the United States this year, declining to 2.2 per cent next year.
Canada would be the fastest expanding member of the Group of Seven major industrialised countries this year with forecast 1998 growth of 3.2 per cent.
