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IMF turns more cautious

about world economy

WASHINGTON: The IMF has cut its forecast

for growth in major industrial nations for this year and next

as the economies of the United States, Japan and Europe have

lagged, international monetary sources said.

The sources, who declined to be identified, said the

International Monetary Fund now expects the Group of Seven

(G7) industrial nations to record growth of about 2.4 percent

in 1995 and some 2.2 percent in 1996.

In April, it forecast that the G7 economies -- Britain,

Canada, France, Germany, Italy, Japan and the United States --

would expand by 3.0 percent this year and 2.6 percent next.

The biggest disappointment has been Japan, where a

long-simmering banking crisis and a super-strong yen earlier

this year has threatened to drag the economy into recession.

In a draft of its semi-annual World Economic Outlook to be

formally released in about a month's time, the IMF forecast

that Japan's economy will grow by a mere 0.4 percent this year

and 1.5 percent next.

But one source said that prediction may have to be updated

to reflect the recent steep drop of the Japanese yen, which

should help the country's exporters and buttress the economy.

In the draft report, the IMF once again urged Tokyo to cut

interest rates to help spur growth, the sources said.

The Bank of Japan's pace-setting discount rate that it

charges commercial banks for loans already stands at a record

low one percent. But international monetary sources argued

that real interest rates -- after factoring out inflation --

remain high in Japan because many prices there are falling.

The IMF has also lowered its forecast for U.S. economic

growth this year, to 2.8 percent from the 3.2 percent pace

expected in April. But it raised its forecast for next year,

to 2.1 percent from 1.9, the sources said.

As previously reported, the Fund praised the U.S. Federal

Reserve for cutting short-term interest rates last month for

the first time in nearly three years. But it has counseled

caution about further rate reductions as the U.S. economy

rebounds from a second quarter slump in growth.

"No more rate cuts are expected," one source said.

In the draft World Economic Outlook report, the IMF also

cut economic growth forecasts for major European nations as

the strong German mark and relatively high interest rates

there have taken their toll on economies there.

It projected growth of 3.1 percent this year and 2.9

percent for Germany, 3.0 percent this year and 2.7 percent

next for both France and Italy, and 2.7 percent and 2.8

percent, respectively for the United Kingdom, sources said.

It urged Italy to cut its budget deficit further to assure

healthy economic growth.

The IMF has also turned more cautious about the economic

outlook for the developing countries and the nations of the

former Soviet bloc, the sources said.

That partly reflects the economic crisis in Mexico this

year, though the IMF expects the the nation's economy to resume

growing in 1996 after shrinking in 1995.

It also reflects some concern at the Fund about a slowdown

in the pace of privatisation and other economic reforms in

some Eastern European countries, including a relaxation of

budgetary discipline, one source added.-Reuter