The head of the IMF said on Tuesday the global economy was at a critical juncture but decisive action from the U.S. Federal Reserve, and hoped-for interest rate cuts in Europe, should prompt a rebound in economic growth in the second half of this year and into 2002.
In an interview with reporters ahead of the International Monetary Fund’s spring meetings, IMF Managing Director Horst Koehler said that while there were elements of “uncertainty” and “unpredictability” to the U.S. economic outlook, there was a “good degree of probability” that the U.S. rebound will materialize.
“The world economy is certainly in a quite critical phase,” Koehler said.
“There is a deceleration of economic activity in the United States, which is stronger and faster than most had expected a month ago, and there is no region all over the world which (is) taking up the slack which means there is a slowing down of the global economy,” he said.
But despite the dark prospects, the German remained upbeat, saying he felt it wrong to “paint everything in negative terms or colors.” Indeed, Koehler said that while business confidence was hurt in the United States, consumer confidence, automobile sales and home sales were still strong.
“I have no doubt that with the right policy response the global economy will recover at the later part of this year and 2002,” Koehler said. “This includes clearly the U.S. economy and I must express my appreciation for the decisive action, particularly the U.S Fed, has taken.”
Just last September the IMF had forecast that the world’s richest economy would grow by 3.2 percent in 2001. But in recent months the U.S. economy has slowed dramatically and the IMF is expected to forecast U.S. growth for this year of just 1.5 percent when it publishes its economic forecasts on Thursday.
In response to that slowdown, the U.S. Federal Reserve has slashed interest rates by two full percentage points to try to reignite growth in the economy, which has expanded for an unprecedented decade.
While Koehler was fulsome in his praise of the U.S central bank, he was less effusive about European counterparts. Nevertheless, he said the global rebound was possible if the right policies are enacted, particularly in Europe.
The head of the global lender said the IMF would like the European Central Bank to cut interest rates there, to boost prospects in Europe and globally. While he said he hoped to reach a “common understanding” with European officials this weekend about the need for lower interest rates, he stressed that he respected the central bank’s independence.
On Japan, Koehler said growth would be lackluster this year and said that corporate and bank restructurings should be a key priority. Koehler said he looked forward to working with a new Japanese government and urged the Bank of Japan to press ahead with a rapid monetary easing.
Koehler said that the world economy was more resilient now and thus more able to weather a slowdown than it was just three or four years ago. On Argentina, which is embroiled in a financial crisis, he said Economy Minster Domingo Cavallo should set out a more specific policy agenda to help rebuild confidence and foster growth there.