IMF: Asian financial woes to spread worldwide

By Martin Crutsinger Associated Press Published:

That's the view of the International Monetary Fund, which is releasing its most extensive assessment so far of the currency crisis that has forced the lending agency to assemble multibillion-dollar bailout packages for Thailand, Indonesia and South Korea.

Because of the rapidly deteriorating situation, the IMF updated its October "World Economic Outlook" with new economic projections for 1998. The document was made public Saturday, although the IMF's had scheduled a Sunday release.

"The repercussions in regional and global financial markets ... have proven much deeper and more extensive than seemed likely only a few months ago," the IMF report said. "The economic implications can now be expected to be more serious."

The IMF projected that the global economy in 1998 will grow at its slowest pace in five years, an increase of just 3.5 percent. That forecast represented a 0.8 percentage-point reduction from two months ago, when the IMF had projected worldwide economic growth at 4.3 percent.

The overall number covers wide differences among countries and regions. For the United States, the IMF forecast economic growth of 2.4 percent next year, down 1.4 percentage points from expected growth of 3.8 percent this year.

About to enter its eighth year of expansion, the U.S. economy already had been expected to slow in 1998. The Asian fallout will reduce growth further. The biggest fallout will come from a widening current account trade deficit, which the IMF predicted will surge by 29 percent to $230 billion next year as weakness in Asia slows U.S. export sales and currency devaluations make Asian goods cheaper for Americans.

The rising trade deficit will present political problems for President Clinton, who has already seen his push for expanded trade-negotiation powers stalled by rising protectionist pressures in Congress.

The IMF predicted the Asian crisis will have an even bigger impact in Japan, the world's second economy, with growth cut almost in half from the October forecast to just 1.1 percent. The agency said Europe, less dependent on Asian export markets, will see growth reduced just 0.1 percentage point from the IMF's October estimate to a revised forecast of 2.7 percent.

By far the biggest adverse effects will be in Asian countries hit in recent months by bank failures, plunging currencies and stock market turmoil. The IMF slashed its growth estimate for South Korea by 3.5 percentage points to 2.5 percent, and reduced Indonesia's by 4.2 percentage points to 2 percent. Thailand, where the troubles began last July, will see no output expansion in 1998.

IMF economists said the sharp growth slowdowns, coming after two decades of rapid growth in Asia, will feel like deep recessions. The economists predicted sizable increases in unemployment, although the report gave no specifics. Private forecasters have said as many as 1 million people will be thrown out of work next year in South Korea alone.

"The type of slowdowns we are going to see in Southeast Asia will be decidedly negative. Undoubtedly, people are going to feel the pain of adjustment," said Michael Mussa, director of economic research for the IMF.

The agency cautioned its revised forecast still could prove overly optimistic. A rebound in Asia starting in late 1998 is assumed, based on the pattern of the 1995 currency crisis in Mexico, where after a deep but brief recession growth resumed in 1996.

But Mussa said a number of downside risks exist, especially if countries delay painful reform measures such as increasing interest rates to support their currencies and restraining domestic demand to reduce trade deficits.

"The major source of uncertainty is how long this turmoil will go on and whether additional countries will get pulled in," he said.

For the United States and other industrial countries, the biggest risk will be that continued turmoil in financial markets will undermine consumer confidence. The latest example of that came Friday, when U.S. investors were shaken by sharp declines in Asian markets.

The IMF, criticized for failing to foresee the impending problems, argued it has been raising alarms about the need to address economic imbalances in various countries.

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