WASHINGTON - The International Monetary Fund yesterday issued a somber report warning that growth in the major industrial countries this year will be more sluggish than expected, in large part because of declining output in Europe and Japan.

The world economic outlook, as the semiannual report is known, is substantially more pessimistic than the one issued in April. And, says an IMF statement accompanying the report, "indications of a resumption of stronger growth in 1994 are still tentative."

However, the report does forecast that lower interest rates in Europe will help lead the region into a shallow recovery beginning by early next year. Japan, too, is expected to recover in 1994 with the help of lower rates.

There is also a bright side for fixed-income markets, because the report says the general slack in industrial countries will keep inflationary pressure in check. U.S. inflationary fears from earlier this year have faded, it notes, and "inflation is likely to remain below 3% in the near term."

The report estimates that the Group of Seven industrial countries will see their average gross domestic product rise by only 1.1% this year, less than the 1.7% increase estimated in April. In 1994, growth is expected to reach 2.2%, less than the previously estimated increase of 2.9%.

Besides the United States, the G-7 countries are Canada, France, Germany, Italy, Japan, and the United Kingdom.

The sharp decline in prices of stocks and other assets "in a number of countries" is a major reason for the pessimistic outlook this year, the report says. The losses in wealth and the repercussions in financial markets have restrained consumption and investment, especially in Japan, it says.

The report also concedes that the costs of Germany's recession and high interest rates have turned out to be more severe than expected. Despite some rate cuts by Germany and other countries, business and consumer demand "has remained muted," it says.

Michael Mussa, director of the IMF research department, told reporters that Japan should get a boost from the economic stimulus package recently unveiled by the Japanese government and the Bank of Japan's decision to slash the discount rate to 1 3/4%.

Still, he said, Japanese companies have been battered by the steep rise of the yen against the dollar, and a "further sharp appreciation of the yen would be detrimental" to Japan's efforts to stimulate domestic demand. The yen has risen over 18% this year against the dollar, making Japanese exports costlier while demand from consumers has stayed soft.

In the case of Europe, Mussa said that unemployment and other social insurance programs are swelling government budget deficits and making it harder to crank up economic growth.

The IMF report estimates that Japan's economy will be essentially flat this year, dipping 0.1%, which is considerably below the projected increase of 1.3% issued in April. Germany's economy, last projected to shrink by 1.3%, is now projected to decline by 1.6%.

France, which was last projected to show no growth this year, is now seen falling into recession with a drop of 1% in GDP.

The United States is projected to have the strongest economy among the G-7 countries, with GDP rising by 2.7% in 1993 and by 2.6% in 1994. These estimates are a noticeable cut lower than the estimates of 3.3% growth issued for both years earlier by the IMF. But growth of approximately 2 1/2% "is an acceptable performance in view of the relatively small margin of spare capacity," the report says.

With the favorable response in the bond market to President Bill Clinton's deficit reduction package, the drop in long-term interest rates should offset any fiscal drag, said Mussa.

On monetary policy, the IMF report hints that it would be appropriate for the Federal Reserve to raise rates slightly as the economy improves. "Although interest rates should be allowed to firm as slack is gradually absorbed in order to avoid any resurgence of inflation," it says, the budget cuts "should permit interest rates to follow a lower path than would otherwise be required."

Despite the generally slow pace of growth for the industrial countries, nations elsewhere are doing better, the IMF report says. The developing countries are projected to see hearty growth of 6.1% this year and 5.5% growth in 1994, led by China and several other Asian nations.

By contrast, the former Communist nations of the Soviet Union and Eastern Europe are expected to continue sinking as they struggle with economic and political reforms. The GDP of Russia and other past members of the U.S.S.R. is expected to contract by more than one eighth, or 13.7% this year, and by 2.4% next year.


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