History of the world economy

IMF warns money crisis will spread: Forecast shows global economic slowdown in 1998

From the Toronto Star
21 December 1997

WASHINGTON (CP) - The financial firestorm raging through Asia will leave no country untouched in 1998. Around the world, economic growth will slow and unemployment will rise, especially in nations at the centre of the crisis.

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 yesterday updated its World Economic Outlook, originally released in October, with new economic projections for 1998.

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

The IMF said there is no reason to be overly pessimistic and that "the threat to global growth from the present crisis is reasonably limited."

Still, it warned the risk of the Asian trouble spreading to other countries had grown and that there was no way of knowing whether the world had yet seen the worst.

"The balance of risks is a little on the downside," IMF chief economist Michael Mussa said at a news conference to present the report.

While noting that growth in North America and Europe looked "well sustained in the period ahead," the IMF warned: "A sharp slowdown in economic growth is an unavoidable consequence of the type of crisis affecting a number of the Asian economies."

Admitting that it originally had misjudged the extent of the turmoil, the IMF appealed to troubled Asian nations to take urgent measures to reform their fiscal systems, keep monetary policy tight and overhaul weak financial sectors.

The lending agency warned that a further slowdown in the already sluggish Japanese economy posed the "key risk" to advanced economies elsewhere in the world.

In the gloomiest section of its report, the IMF predicted the Japanese economy would grow by only 1.1 per cent in 1998 compared with 1.0 per cent this year and only half what had been forecast in October.

Europe, less dependent on Asian export markets, will see growth reduced just 0.1 percentage point from October's estimate to 2.7 per cent.

Economic growth for Canada now is forecast at 3.2 per cent compared with an estimated 3.7 per cent this year and off 0.3 of a percentage point from the October estimate.

For the United States, the IMF forecast economic growth of 2.4 per cent next year, down from an expected 3.8 per cent.