Global recovery forecast to be slow

Prospects for the global economy have improved, but recovery will remain sluggish for the next two years, according to Stephen Roach, Morgan Stanley Dean Witter's global chief economist.

Mr Roach yesterday said there would be a gradual pull-back from the brink of disaster that appeared imminent last year.

This year would be a time of economic healing, with no dynamic turnaround in economic fortunes, he said.

Mr Roach said he revised forecasts for gross domestic product to 2.4 per cent from 2 per cent for this year and to 3.2 per cent from 3 per cent for next year.

He said the global transition to recovery from crisis could be traced to three factors: The recent cuts of interest rates by Group of Seven central banks; The prevailing deflationary environment that was providing consumers with far greater purchasing power; and The International Monetary Fund's US$181.5 billion rescue plan for the world's beleaguered economies.

Moreover, Latin America had defied market concerns by staying relatively intact, he said.

Mr Roach attributed this partly to the fact the region's economies were less interlinked and more closed than those of Asia, thus preventing a contagion effect.

'When you have them altogether, they are the functional equivalent of a large tax cut for the global economy,' he said.

Mr Roach said his positive outlook was contingent on assumptions that G7 nations would continue to lean towards monetary easing, there would be no global credit crunch and Brazil was the last link in the chain of economic meltdown.

It was also contingent upon Asia recovering without help from Japan and that fears about the millennium bug prove to be exaggerated.

Mr Roach said he was particularly encouraged by what he believed was the improving outlook for the mainland.

Having come away from a mainland visit in November pessimistic, he said more recent events had left him with a more positive picture.

Describing concerns about the mainland's economic strength as 'overblown', Mr Roach said the reform process in the country's financial sector was a positive sign.

The mainland also would benefit from the slowly recovering global economy, which would help rejuvenate its export performance.

'China should no longer be judged as a serious risk factor for the global economy or for Asia,' he said.