Sun, Feb 23, 2003 page11

• Euro-region outlook lowered by IMF as Iraq invasion looms

  • BLOOMBERG
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  The IMF has lowered its 2003 growth forecast for the dozen nations sharing the euro, citing the threat of war with Iraq that's hanging over the world economy, according to an Italian Treasury official.

  The IMF predicts the euro region will expand 1.3 percent, compared with its forecast of 2.3 percent just five months ago, said the official, in Paris for a meeting of finance ministers and central bankers from the G7 major industrial nations.

  The likelihood of a war in the Persian Gulf region, where the US and UK are deploying 225,000 troops, is causing companies and consumers to spend less, said the official, who asked to be unidentified. US Treasury Secretary John Snow voiced that concern earlier.

  Iraq is an ``overhang, affecting investment decisions and causing people to postpone investment decisions,'' Snow told reporters in Paris.

  The world's three largest economies -- the US, Japan and Germany -- are struggling to expand, while the Bush administration and the EU are at odds on policies from tax and budget deficits to waging war on Iraq.

  The euro area probably grew by 0.8 percent last year, its slowest rate in a decade, according to the European Union.

  An IMF official said Monday that a war in Iraq may cut global economic growth in half from last year. Growth may fall to as little as 1.5 percent this year from 3 percent in 2002, Rogerio Zandamela, the IMF's representative in Brazil, said during conference on the world's economy.

  Without a war, global growth may accelerate to as much as 3.5 percent this year, Zandamela said, citing preliminary statistics.

  The IMF will release its World Economic Outlook in April.

  The signs of weakening are widespread throughout Europe.

  Germany's gross domestic product gained 0.2 percent last year, its smallest increase since 1993. The US economy, the world's largest, grew at a 0.7 percent annual pace in the fourth quarter, from 4 percent in the July-September period. Japan's economy, aided by a surge in fourth-quarter exports, still grew only 0.3 percent last year.

  While the UK economy has avoided recession, its 1.7 percent growth last year was the slowest in a decade.

  The IMF's chief economist Kenneth Rogoff said earlier this month that Iraq is adding to the uncertainty among investors, making the world's economic recovery more "tepid." Federal Reserve Chairman Alan Greenspan and the chief executives of companies such as Dupont Co have identified the war tension as the biggest obstacle to stronger growth.

  "Fear of a `bad war' is putting a constraint on growth, but this does not mean a delay is good for the economy," Lehman Brothers said in a report today. "A lack of resolution in Iraq could hurt the [world] economy."

  Snow began his first round of meetings with the world's top finance ministers by arguing that if Congress endorsed President George W. Bush's proposed US$690 billion package of tax cuts by mid-year, the US economy would expand 3.3 percent this year.

  That would allow the US to play its part in boosting a weak global economy by boosting equities, creating 500,000 new jobs and helping to stoke growth around the world, he said, according to US officials.

  Bush's tax-cut plan may raise the US budget deficit to a record US$307 billion next year. The Japanese government will cut taxes by ¥1.8 trillion (US$14.9 billion) in the fiscal year starting April 1.

  By contrast, EU budget rules are forcing some countries to scale back tax cuts and others to raise taxes.

  Planned tax increases in Germany may cost companies as much as 17 billion euros a year.

  "The economies aren't doing as badly as all that and have held up well to the various shocks that have occurred in the past two or three years," French Finance Minister Francis Mer said yesterday. "We need to find ways of improving the situation even more, irrespective of the situation in which we find ourselves."
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