WASHINGTON -- A grim tone of uneasiness about the world economic outlook hangs over this week's annual meetings of the International Monetary Fund and the World Bank, which formally open tomorrow.
U.S. and IMF officials were unusually frank in admitting that they are worried about the recession that has spread among the major industrial nations, with the notable exception of the United States and Canada.
The revised IMF economic forecast released last week shows that officials now expect Japan's economy to be essentially flat this year. Japan's government recently announced its third spending package to try to turn things around, and the central bank has slashed the discount rate to 1 3/4%, an all-time low.
In Europe, the German-led recession brought on by a tight Bundesbank and unexpectedly, high reunification costs has spread to France. Across the continent, high unemployment rates are likely, to go even higher next year, IMF managing director Michel Camdessus said.
According to international specialists in the Bureau of Labor Statistics, jobless rates in France, the United Kingdom, and Italy during the spring ranged between 10% and 11%. Throughout the European Community, 40% of all workers have been out of a job more than a year, according to the IMF.
European countries are running large budget deficits. which in effect rules out government spending programs to try to jump-start economic growth. Such measures would only frighten the financial markets and push up interest rates, undoing the benefits of the recent rate cuts by German and other central banks. Higher rates could also send shock waves through Europe's nervous foreign exchange markets.
European budgets cannot easily be trimmed. Taxes in many countries are high and the deficits are being swelled by, generous unemployment, health-care, and other social safety-net payments to workers and retirees. The IMF's semiannual economic report notes that in some cases, unemployed workers do not have much incentive to take a job because jobless benefits nearly, equal after-tax income.
Adding fat to the fire is the trade situation, which is going nowhere. European and U.S. negotiators are still locked in a fight over completing the Uruguay Round of trade talks to open global markets.
Meanwhile, the stagnant economies of Europe and Japan are fueling protectionist sentiment to raise trade barriers rather than lower them. In the United States, 'the Clinton administration is preoccupied with a tough fight to win congressional approval of the North American Free Trade Agreement.
Taken together, these factors suggest that unless the industrial nations can revive economic growth and trade, there is a risk that the U.S. economy will be dragged back into another downturn. possibly a global one. No one is predicting this will happen. Indeed, the IMF forecast calls for modest U.S. expansion to continue this year and next while Japan and Europe experience mild recoveries.
But Camdessus stressed that potentially "devastating trends" in the major industrial countries must be reversed.
A senior Treasury official acknowledged that the United States alone is not strong enough to pull everyone else up. "In a balanced economy, there can be no single engine for growth." the official said. While America is hoping for a prompt recovery in Europe, there is a belief "that the dangers are more on the slow side than they are on the overheating side," he said.
Over the short term. the U.S. formula to avoid a global downturn calls on European central banks to lower interest rates further to help stimulate business investment and consumer spending. The hope is that lower rates can be accompanied over a longer time by government budget cuts.
But tackling the budgets will be difficult and take time for European countries, where rising unemployment and stagnation are pushing up government outlays in politically charged environments. The time is not exactly ripe for labor market reforms that the IMF and the United States say are urgently needed to get Europeans working again.