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U.S.: IMF Says Economic Recovery May Be Losing Steam

The International Monetary Fund says it is lowering its growth forecast for the United States, at least partly because of continued weakness in the stock market. This weakness, it says, is sapping consumer and business confidence and hurting the overall economy. Both the U.S. and European economies appear to be losing steam, and it's not clear where the momentum for a recovery will come from. Analysts say the possibility of a "double-dip" recession, at least in the U.S., cannot be ruled out.

Prague, 6 August 2002 (RFE/RL) -- The International Monetary Fund has indicated it will lower its growth forecast for the U.S. economy, fueling concern the U.S. may be heading for a "double-dip" recession. That term is used to describe two recessions in a row interspersed by a brief recovery.

The IMF said in a report yesterday that the outlook for the U.S. economy remains "broadly favorable," but that the downside risks have "intensified."

The IMF had been predicting the U.S. economy would expand 2.3 percent this year and 3.4 percent next year. It wasn't clear how much the fund intends to lower those figures. The IMF will publish the projections next month in its annual "World Economic Outlook."

Yesterday's report praised the U.S. economy for having withstood the shocks of the 11 September terrorist attacks, but said a string of corporate-accounting scandals created what it called "turbulence in the equity [stock] markets." This in turn has sapped consumer and business confidence and created risks for the economy as a whole.

The IMF report has intensified concern over the possibility of a double-dip recession. Double dips are relatively rare. They usually occur when an outside shock -- for example, a sudden rise in oil prices or a boost in interest rates -- strikes an economy that is just coming out of recession.

Most economists say a double-dip recession in the U.S. at this point is not likely. Robert Prior is a European economist at HSBC bank in London. He said a double-dip recession is unlikely. "Obviously, [a double-dip recession] can't be ruled out, but we would assign quite a low probability to it. Basically you get double-dip recessions when you have big policy adjustments, big increases in interest rates. Obviously we haven't had that. We don't think the fall in the equity market is big enough to trigger a double-dip recession by itself," Prior said.

U.S. stock prices have fallen 30 percent since the start of the year, pulled lower by a series of bankruptcies and corporate scandals affecting a number of high-profile companies. The sudden collapse of seemingly successful companies like Enron and WorldCom -- after it emerged they had lied in their corporate accounts -- has frightened average investors, who are now leaving the stock market in droves.

The IMF was not immediately available for comment. But analysts agree with the Fund's assessment that the downturn in stocks is being felt throughout the general economy in the form of weaker consumer and business confidence.

Prior agrees. "Yes, inevitably, the U.S. consumer and indeed U.S. [corporations] are sensitive to what happens in the equity market. The weakness we've seen in equities could easily knock something like 1 percent off of GDP within a six- to 12-month time horizon," Prior said.

The report comes at a time when the economic recovery in Europe also appears to be losing steam. A survey -- the Reuters-NTC Research purchasing managers' index -- this week of European purchasing managers indicates the European Union's eurozone economy is growing but that the pace of recovery is slowing.

Prior said the HSBC is now considering lowering its growth projections for the eurozone this year and next. "We're certainly thinking of revising [projections] down. We thought the European economy would gather momentum in the second half of this year, but that's looking increasingly [un]likely. We think more likely is relatively lackluster growth for the next two or three quarters, perhaps on the order of 2 percent annualized numbers. And I think going into 2003 there's a renewed risk of weakening in activity," Prior said.

Prior said France, as the exception, is doing well. But Germany, the eurozone's largest national economy, is lagging -- with no upturn in sight.

Stefan Schneider, an analyst with Deutsche Bank in Frankfurt, said the German economy's problems are complicated and can be traced as far back as debts incurred to finance German reunification in the early 1990s. He identifies three factors that are seen as hurting the German economy. "[One] is the payments and problems related to unification. [Another] is the recession in the construction sector, which is obviously not unrelated to unification. And [the last] is related to problems in the labor market, meaning that it's overregulated," Schneider said.

Analysts say it is hard to see where the impetus for economic recovery will come from.

Prior pointed out that consumers, particularly in the U.S., are saddled with high levels of debt and that businesses -- which invested heavily in new technology in the 1990s -- are not ready to start investing again. "I think the problem in the [United] States in particular is still the issue of imbalances: very high levels of consumer debt, big current-account deficit, [and] a continuation of overinvestment difficulties, which is still holding back capital spending. So it's unclear where the big bounce to activity is going to come from," Prior said.

Schneider said in Germany, no one is looking for a quick recovery. He said recoveries are usually led by one of two things. The first is an increase in exports that leads to renewed investment. He said this is being hampered by the rise of the euro, which makes German goods relatively more expensive to buyers outside the eurozone.

The second is that low inflation and continued low prices for things like oil will induce consumers to spend more. Unfortunately, he said, there no evidence yet that that is happening.

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    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.