IMF fears weak euro, oil prices may stunt growth

The International Monetary Fund yesterday praised the stellar economic performance around the world, but said high oil prices were casting doubts over upbeat forecasts for next year.

The global lender also said the collapse of Europe's sagging single currency could hurt economies in Europe and beyond.

The World Economic Outlook, the IMF's flagship publication on the state of the global economy, forecast world growth of 4.7 per cent this year and 4.2 per cent in 2001, well above the forecasts it made six months ago.

But Mr Michael Mussa, IMF chief economist, said the higher than expected oil price could knock half a percentage point off those growth figures, bringing global growth down to 3.75 per cent.

"Rather than 4.25 [per cent] next year, we think of 3.75, assuming that the increase in oil prices does recede gradually over the course of the year," Mr Mussa said. "If oil prices were to stay at $35 a barrel throughout 2001 or if they were to escalate to $40 a barrel or over, then the impact on inflation and world growth would be more significant."

Mr Mussa said current oil prices, which have risen $6 to $7 since the IMF completed its economic forecasts in August, would add some $200 billion (€234.9 billion) to the world's annual energy bill. This would depress global demand for goods and services and thus dampen world economic activity, he said.

On the euro, Mr Mussa said the time could be right for concerted intervention to support the currency. "Circumstances for intervention are relatively rare, but they do arise," Mr Mussa told a news conference launching the report. "One has to ask `If not now, when?' "

Mr Mussa said financial markets had pushed the euro below levels which were justified by economic fundamentals. He said the weak euro would only complicate efforts to rein in the record US current account deficit or to manage European monetary policy, and it could even undermine Japan's fragile economic recovery.

The IMF's forecasts for 2001 show the countries using the euro zone growing 3.4 per cent next year, slightly faster than the long-booming United States where growth is forecast to slow to a more sustainable pace of 3.2 per cent.

The global lender urged the EU to set a credible timetable to bring in new members from central and eastern Europe, but said the newcomers might face problems if they introduced the euro too quickly.

"Full economic convergence with the income levels of western Europe will take years, probably decades in most cases, to accomplish, well beyond any prospective timetable for the adoption of the euro," it said.

The report's release begins almost two weeks of meetings in the Czech capital, Prague, which is hosting the annual meetings of IMF and World Bank.

Angry protest groups have vowed to disrupt the gatherings, contending the global lenders are making life worse for poor countries and their people.