IMF says global recovery is under threat

The recovery in the world economy is under threat and central banks should stand ready to cut interest rates again if needed, …

The recovery in the world economy is under threat and central banks should stand ready to cut interest rates again if needed, the International Monetary Fund (IMF) says.

In gloomy forecasts released yesterday, the IMF cut its projection for US growth next year by nearly a percentage point to 2.6 per cent compared with its previous forecast in April, with the effects of falls in stock markets taking their toll.

IMF chief economist Mr Kenneth Rogoff backed the US Federal Reserve's wait-and-see policy on interest rates but said it should be ready to cut again.

The fund slashed its forecast for euro zone growth this year to just 0.9 per cent, with an anaemic recovery to 2.3 per cent next year, saying that "if monetary easing is not warranted now, a bias in that direction is". But Mr Rogoff warned that there was only so much that lower interest rates could do, and that Europe was failing to live up to its "enormous potential" to restart strong productivity growth by failing to carry through structural reform. The time has come for Europe to decide whether it is going to be a "locomotive of growth or a caboose", he said.

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The report comes as fears of a "double dip" recession grow in the United States as the prospect of war with Iraq raises concerns about higher oil prices and of a slump in consumer spending .

The indefatigable US consumer has been the mainstay of the economy in the absence of robust business investment in the last 18 months, but the index of consumer confidence has fallen to its lowest point since November.

The slide of the Dow Jones this week to its lowest point in four years, and the Nasdaq composite index to a six-year low, has created a mood of resignation on Wall Street.

Many economists felt that US Federal Reserve chairman Mr Alan Greenspan would announce a rate cut after the Fed's policy committee meeting on Tuesday, in light of mounting corporate earnings warnings, increasing unemployment and weakening economic activity.

The market was disappointed when the Fed announced that it would leave short-term interest rates unchanged, but what analysts noted was that two central bank policymakers had dissented, arguing for a further cut.

The open revolt against Mr Greenspan, the first by two members since 1998, revealed the Fed to be divided about how to get the economy back on track and turn around a two-and-a-half year bear market which has brought the Dow down 23 per cent so far this year.

It also reinforced the apprehension that despite Mr Greeenspan's repeated assurances in recent months of a recovery, the economy is in worse shape than he calculated, that corporate profits may be weaker than feared, and that the economy may be at risk of stalling again.

The dissent of two of the 10 members of the Fed committee means also that a rate cut will be on the agenda when the fed open-markets policy-making committee meets again in November, possibly to ease the market fall-out from a war with Iraq.

There are no turning points visible ahead. The short-term stimulus package promised by the administration has been shelved, and US President George Bush has little to offer Wall Street other than a call to Congress to pass terrorism insurance legislation, make last year's tax cut permanent and to restrain spending.

Mr Bush continues to express optimism about the economy, saying on Tuesday: "When you combine the productivity of the American people with low interest rates and low inflation, those are the ingredients for growth."

Budget Director Mr Mitchell Daniels said that Mr Bush is "still open to and looking at options" on the economy, but "you'll hear from him if and when he sees that combination that he thinks has practical value".