Report: IMF Sees Long Iraq War Slashing World Growth

The International Monetary Fund sees a long war in Iraq cutting global economic growth by up to two percentage points from a revised 2003 forecast of 3.3 percent, Germany's Handelsblatt daily reported on Tuesday.

In the IMF's World Economic Outlook obtained by the business daily ahead of publication in April, the IMF warned of "serious economic consequences" from an Iraq war and lower growth if it went on for a long time and spread to other regions.

The newspaper said the report cautioned that a war could spark a global downward spiral if oil prices shot up, consumer and investor confidence sunk and uncertainty in financial markets rose, with the U.S. and euro zone economies expected to be hit hardest.

"In a series of countries, the financial systems would come under pressure if share prices fall further and bad credit were to increase," the paper quoted the IMF as saying, adding that could have uncertain effects for banks and insurers.

To deal with the crisis, Handelsblatt said the IMF had recommended speedy interest rate cuts by central banks and called for short-term bridge financing for countries in financial crisis in case of a serious economic slump.

Handelsblatt confirmed a report in Italy's Il Sole 24 Ore business daily last month that the new IMF outlook would cut its growth forecasts for leading economies even without war.

The German daily said the new outlook saw global growth in 2003 of 3.3 percent, down from 3.7 percent forecast by the IMF in September. The figure could, however, come out up to two percentage points lower if war breaks out, Handelsblatt said.

The newspaper quoted the new IMF outlook as saying the global economic recovery had slowed since the last quarter of 2002, particularly in industrial nations.

It saw the U.S. economy growing 2.4 percent in 2003, down from an earlier forecast of 2.6 percent and Japan growing 0.5 percent, down from 1.1 percent seen in September.

The IMF outlook cut its euro-zone growth forecast to 1.3 percent from 2.3 percent and for Germany to 0.7 percent from 2.0 percent seen in September, Handelsblatt said, confirming figures published in Il Sole 24 Ore.

The newspaper said a war would probably mean that Germany's 2003 budget deficit overshoots the European Union's limit of three percent of gross domestic product, as it did in 2002.

IMF Managing Director Horst Koehler said last month the world economic recovery had been postponed but that if any war in Iraq could be kept short then there could be some "positive surprises" for the economy.