World Economy Risks - 2004

The risks for the world economy in 2004

WASHINGTON, (AFP) - Lurking behind dream forecasts of a US-led global economic bounce in 2004 are nightmare scenarios of a frightful plunge in the dollar, trade war, disease, conflict and terror attack.

Menaces such as a damaging deflationary spiral, an impending financial collapse in Japan or a looming war, have subsided.

But "a variety of dramatic downside threats that were present in 2003 persist," said Citigroup economist Kermit Schoenholtz.

"These include the possibilities of new acts of terrorism, conflict on the Korean peninsula, a return of SARS (news - web sites) and oil supply disturbances," he wrote in an annual roundup of global prospects.

"In addition, new concerns including growing pressures for protectionism in the industrial world may become prominent over the coming year, especially in the runup to US elections (in November 2004)."

The dollar cast the darkest shadow over economists' 2004 forecasts for a self-sustaining US recovery and global growth of 4.0 percent or more, from about three percent in 2003.

Citigroup said it expected the dollar to retreat in the medium term against the euro and the yen, pressured by a huge and expanding American current account deficit.

The euro would advance to 1.37 dollars by 2008 from about 1.21 now, it said. In the same period, the dollar was slump to 88 yen from 108 yen.

But "a sharper-than projected dollar decline could undermine stablization efforts in the euro area and Japan, and may be associated with a larger risk premium on US assets than we forecast," said Schoenholtz.

"One possible trigger would be fear of protectionism." ...Continued