The global economy should enjoy its strongest growth in seven years in 1995, but that bright prospect is threatened by the recent weakness of the dollar and the turmoil in the Mexican economy, the International Monetary Fund says.
In its latest survey of global economic conditions, the IMF predicted Sunday that the economic recovery would gather steam in most of the world, although it forecast a significant slowdown in the United States this year and next.The IMF outlook projected the U.S. economy, as measured by the gross domestic product, would rise by only 3.2 percent this year and drop to even slower growth of 1.9 percent in 1996.
While such a slow pace would normally raise recession worries, IMF chief economist Michael Mussa put the chances of a U.S. downturn only in the "modest" range, at around 22 percent.
But the IMF did concede there were significant risks to its forecast, stemming mainly from fears that Mexico's economic crisis could spill over to other countries and that the dollar would continue to plunge. It has dropped to record lows against both the Japanese yen and the German mark.
The dollar was expected to be the chief topic when finance ministers and central bank presidents of the world's seven biggest economies - the United States, Japan, Germany, Britain, France, Italy and Canada - meet in Washington on Tuesday to prepare for spring meetings of the 179-nation IMF and the World Bank.
IMF Managing Director Michel Camdessus took the unusual step last week of publicly urging the Federal Reserve to boost interest rates as a way of defending the dollar even though the Clinton administration is worried that further Fed tightening could turn an economic slowdown into an outright recession.
The IMF used Sunday's release of its economic forecast to elaborate on Camdessus' arguments, not-ing that a boost in U.S. rates would be especially appropriate given that both Germany and Japan have reduced their rates in the past two weeks.
Higher U.S. interest rates in relation to Japan and Germany would serve to bolster the U.S. currency because dollar-denominated investments would offer a greater rate of return.
In briefing on the economic outlook, Mussa told reporters that the IMF was assuming the Fed over the course of this year would increase rates by another one-half percentage point on top of the 3 percentage points of tightening it has already engineered.
Financial markets, however, were not optimistic that the Group of Seven meeting Tuesday would be able to produce a convincing rescue plan for the dollar given America's reluctance to boost rates further.
In its new economic forecast, the IMF predicted that the world economy would expand by 3.8 percent this year and an even better 4.2 percent in 1996. These would be the best rates since a 4.6 percent surge in 1988. Global economic output grew by 3.7 percent last year, up sharply from 2.5 percent in 1993.