US told to halt spending spree

The International Monetary Fund told the United States to cut up its credit cards yesterday, in a stark warning that the world's largest economy needs to spend less to stave off potential turbulence.

"The United States needs to save more," said Raghu Rajan, the IMF's chief economist, at the launch of the World Economic Outlook, the IMF's twice-yearly report on the global economy.

According to the IMF report, international economic performance is being dangerously unbalanced by the US's twin budget and trade deficits sucking up a disproportionate share of world activity.

"The US consumer, who has bought the world out of recession, needs to rest tired feet and save more," Mr Rajan said.

The report shows that the bright spots of robust growth in 2004 - when the world economy expanded by 5.1%, its fastest rate for decades - may be overshadowed by the unsteady concentration of rapid growth in the US and China, and the dangers of see-sawing oil prices.

The IMF is forecasting continued strong growth during the next two years, with global output expanding by 4.3% this year, and 4.4% in 2006. It nudged up its projections for US growth, which it predicts will increase by a rapid 3.6% this year and next.

China's economy, which raced along at 9.5% growth in 2004, is predicted to marginally decelerate to 8.5% this year, and 8% in 2006.

The IMF's analysts remain critical of the eurozone's poor record on growth and employment, as well as becoming more pessimistic about Japan's outlook.

At their sluggish rates of growth, Europe "simply cannot afford its welfare state, while Japan will have difficulty dealing with its fiscal problems", Mr Rajan added.

"When call centres are helping firms around the world squeeze 24 hours into a working day, Europe cannot still be debating stretching 35 hours into a work week," he said, in a reference to France's employment legislation.

Compared with its previous forecast, the IMF has scaled back growth in the eurozone to 1.6% in 2005. It also dramatically slashed its forecasts for Japan's economy back to 0.8% this year and 1.9% in 2006, compared with predictions of 2.6% and 3.4% six months ago.

"Global growth remains unduly dependent on the US and China; growth in the euro area and Japan - together accounting for one fifth of global output - has once again been disappointing," the report said.

"If this situation persists it will widen global imbalances; it would also raise the risks of a more significant slowdown later on, especially if growth in the US and China were to weaken simultaneously."

The report says that the US is especially vulnerable to sharp rises in interest rates or steep falls in the dollar's exchange rate, warning that "a further - possibly disorderly - drop of the US dollar cannot be ruled out". It predicts that the burgeoning US trade deficit will worsen, accounting for 5.8% of the economy's output this year.

Oil remains a big uncertainty for the world's economy, with the IMF forecasting that prices will hover around $45 a barrel this year.