WASHINGTON - Sluggish growth in other leading industrialized nations will continue to hold back the U.S. economy this year, Lawrence Summers, Treasury undersecretary for international affairs, said yesterday.

"The world growth problem remains." Summers told the Senate Banking Committee's subcommittee on international finance and monetary policy. "Sound growth in our principal trading partners, coupled with open trade and payments systems, is increasingly essential to the health of the U.S. economy."

Summers appeared before the subcommittee to discuss the administration's annual report to Congress on international economic and exchange rate policy that was released yesterday.

The report cites forecasts from the International Monetary Fund predicting very slow growth in the other G-7 nations this year, including a 1.3% decline in real growth in Germany and 1.3% growth in Japan.

"We are in the third year of sub-par growth, and the prospects for sustained recovery are by no means certain, " Summers told the subcommittee. "There's more room on the downside for disappointment than on the upside."

Summers said the administration has not given up hope that the U.S. economy will grow at least 3% this year. By contrast, the IMF had forecast 3.2% real growth in the United States this year.

One drawback to stronger growth at home is that the U.S. trade deficit is expected to widen significantly, the Treasury report says.

The report also cites IMF projections that the U.S. trade deficit, on a current accounts basis, will widen to $101 billion this year and $131 billion in 1994, after a $62.4 billion deficit in 1992. The figures represent a broad measure of trade that includes investments and services as well as merchandise.

The Treasury Department said the IMF estimates may be a little on the high side, but the department also predicts a U.S. trade deficit over $100 billion by 1994.

The U.S. trade deficit widened last year for the first time in four years, the report noted.

"This reversal was not unexpected, since the U.S. economy was in recovery mode while major trading partners were heading into recession," the report says. "Thus. the deterioration in the U.S. external position is not seen as symptomatic of a decline in U.S. competitiveness, but rather as the result of cyclical factors."

During yesterday's hearing, Summers acknowledged that slow world growth is not the only thing that could threaten short-term growth in the United States.

Both fiscal and monetary policy could hamper growth if President Clinton's deficit reduction plan goes into effect and the Federal Reserve raises short-term interest rates to fight inflation, Summers noted.

"Clearly, higher interest rates do not contribute to higher growth in the short run." Summers said.

In defense of the Clinton plan, Summers said reducing the deficit would help keep long-term interest rates down, which in itself stimulates growth.

In addition, Summers predicted the Fed will not raise short-term rates in the near future because inflation will not pose an immediate threat to the economy.

"My expectation is that inflation will not be a problem and interest rates will not have to be raised." he said. "But one can never completely discount the threat of higher interest rates."

Summers also flatly denied that the administration was attempting to weaken the U.S. dollar against the Japanese yen to shrink the U.S. trade deficit with Japan. "We reject artificial manipulation of exchange rates," he said. "There is no way to devalue yourself into prosperity. "

The report also cites IMF forecasts that Japan will continue running large trade surpluses in the next few years. The IMF expects the $137 billion this year, on a current accounts basis, up from $117 billion last year.

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