IMF chief sees no recession

THIS is the time of the year when the International Monetary Fund looks into its crystal ball and attempts to forecast what will happen to the global economy in the 12 months ahead.

Given the sharp financial shock of the attacks in the US a year ago, the impact of Enron and uncertainties surrounding Iraq, it is surprisingly sanguine in its views.

It is perhaps first worth noting that despite the disruption to global finance as a result of September 11, a new IMF analysis just released suggests that the overall impact on five-year average growth in the US will be around 0.2%, a large enough number, but not one that is threatening given the extraordinary resilience of the global economic machine.

The new IMF world economic outlook forecast is expected to show global growth at 2.8% in 2002, above the 2.5% many consider to be a recession. It does, however, expect a bounce back in 2003, when it forecasts global outbeyondput at 3.7%, slightly lower than its previous projection of 4% made in April.

The IMF's managing director, Horst Koehler, is sufficiently confident that although there are 'risks and uncertainties', fears of recession appear to be wide of the mark. Growth rates in Britain, Europe and Japan are likely to be lowered, but there seems to be some confidence that Japan can do better, despite the appalling state of its banking system.

While most of the Western economies do appear to have come through the fire reasonably well, Koehler admitted in a speech in Tokyo that, in its dealings with emerging market countries in Latin America - Argentina, Brazil and Uruguay - the Fund 'still has a lot to learn'.

That alone is a step forward. Koehler may not be regarded as among the most intellectually robust of financial leaders, but he is the first IMF boss one can remember who has acknowledged that the accumulated wisdom of the Fund is not always enough. That is a distinct advance on the arrogance of his predecessors.

Rights and wrongs

EACH economic cycle exposes a different part of the financial system. At the end of the 1990s, it was the banks with their property exposure which needed new capital - this time around it is the insurers.

David Prosser of Legal & General has smartly taken advantage of his group's premium rating to nip into the market and take out a brisk £786m.

L&G's growth has been phenomenal in recent years. Market share has climbed from 3.3% to 8.7%, based around a good range of cheaper, low-cost insurance, savings and pensions products.

It has won distribution deals with Barclays and Alliance & Leicester, increasing its reach beyond the traditional financial adviser.

This, by no stretch of the imagination can be considered a measure born out of desperation, as was Zurich last week.

Still, the L&G decision is worthy of closer scrutiny. Prosser's insistence as recently as July that the company's capital position was 'resilient' looks a little thin now.

The company has sought to portray the rights issue as a demonstration of confidence pointing to the prospects of maintaining its phenomenal growth rates. But in Britain, at least, there are more than a few uncertainties, not least as a result of the Sandler report on long-term savings, which proposed sweeping changes in the way insurance products are sold.

Furthermore, even though L&G has a much better franchise than some of its rivals, the stock market falls have posed many of the same problems in terms of thinning out its free capital ratio - the safety margin which insurers are required to maintain. This was as much part of L&G's reasoning as anything else.

Even though the reception in the market for L&Gs fund raising was favourable, there are still serious concerns about which company in the sector will knock on shareholders' doors next. Aviva ( formerly CGNU) denies it will follow, but ailing Royal & SunAlliance remains hot favourite to follow suit.

But questions also have to be asked about other insurers. Lloyds TSB and Abbey National are the banks which have advanced furthest down the bancassurance track, and could start to feel pressure on their balance sheets. So we have not reached the end of this road at present.

One of the real worries is that it is the financial sector which so often jumps the queue at the bottom of the economic cycle. Of course, keeping our insurance and banks sound is a key to financial stability.

But there must be the fear that, when the manufacturing upturn eventually comes, as it surely will, the market will have had more than its fill of rights issues, and there will less capital available for replenishing the nation's industrial base.