Soothsaying on the global economy

A MOOD OF optimism pervades the global economic forecast made by the International Monetary Fund. The positive outlook of the IMF is not surprising because the last time it made its predictions was in April 2003 when there were two major uncertainties hovering over the global economy. The war on Iraq threatened to take crude oil prices through the roof and the Severe Acute Respiratory Syndrome (SARS) had enfeebled the economies of south-east Asia. Now, six months later, both these negative factors have disappeared. Still it is a moot point if there is scope for as much optimism about the growth impulses in the global economy as presented in the IMF's World Economic Outlook. The IMF forecasts that the world economy will grow by 3.2 per cent this year and by 4.1 per cent in 2004. If this turns out to be accurate, world economic growth in 2003 will be the highest since the "new economy" meltdown in 2000.

The IMF lists three important reasons why it believes that the "upside risks" in its forecasts outweigh the "downside risks": an end to geopolitical uncertainties, the recovery of equity markets and the stimulus from expansive policies in the advanced economies. However, among these three factors there can only be some certainty about the recovery in global equity markets. True, there are no major geopolitical uncertainties currently threatening the global economy. But while the invasion of Iraq was completed quickly, conflict has not ended. The costs of the Iraq war are continuing to mount and it is clear that the U.S. vastly under-estimated the financial implications of the war. President George Bush has asked for $77 billion over and above the $79 billion already authorised for the war. The additional demands for meeting the costs of the continuing U.S. military presence in Iraq will have an impact on the U.S. Government's finances. The policy stimulus that the IMF sees as driving growth has taken place more in the U.S. than in the E.U. and Japan. Tax cuts more than additional spending by the U.S. Government have contributed to an expansive policy. This naturally has unsettled the U.S. budget considerably. An ever-increasing outlay on military operations in Iraq may enlarge the U.S. budget deficit, but will not provide the same stimulus to the domestic economy as other forms of Government expenditure. It may therefore be a little unrealistic on the part of the IMF now to revise upwards its forecast of growth in the U.S. in 2003 and 2004. Since the global projections are based on an "unbalanced recovery", which is driven almost entirely by the U.S economy, any uncertainty about the short and medium-term prospects of the world's largest economy will pull down global economic growth as well.

The excellent monsoon in India has naturally compelled the IMF to revise its prediction of economic growth in India to 5.6 per cent for 2003. If this seems lower than what most Government and independent agencies within the country have been forecasting, it is because the IMF forecast is for the calendar year 2003, while the impact of the 2003 monsoon will be reflected more in GDP growth in the financial year 2003-04. India is the only major developing country for which the IMF has revised its growth estimate. Unfortunately for the IMF, the bi-annual economic forecasts have not, in the past, turned out to be very reliable. The global economy will hope that this time at least the forecasts are on the mark.

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