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IMF: Eurozone debt crisis to slow down the world economy

The IMF has dramatically downgraded its expectations for economic growth around the world, with Europe to blame.

A RECESSION IN EUROPE will slow the global economy this year, the International Monetary Fund predicted today, while urging world leaders to focus on growth more than budget cuts.

The IMF forecasts global growth of 3.25 per cent this year, slower than the 4 per cent pace it projected in September.

The 17 nations that share the euro will shrink 0.5 per cent this year. In September, the IMF had predicted 1.1 per cent growth for the region.

Europe’s recession should have only a modest impact on the United States. The IMF projects 1.8 per cent growth for the year, unchanged from its September estimate.

The IMF warns against steep budget cuts, which it says will slow growth further and undermine market confidence. The global lending organisation’s message runs counter to the push for budget cuts advocated by German Chancellor Angela Merkel.

In light of the weaker growth, European governments should avoid extreme austerity measures — spending cuts and tax increases — the IMF said in its World Economic Outlook. Healthier European countries whose governments are facing lower interest rates “should reconsider the pace” of their short-term budget cuts.

IMF managing director Christine Lagarde made a similar argument yesterday during a speech in Berlin.

Mixed effects

European banks, meanwhile, are cutting back on lending in order to boost their capital reserves, the fund said. This is likely to hammer Central and Eastern European economies this year, which depend heavily on European bank loans.

The cutbacks will also slow growth in many Asian economies, the IMF said, where European banks finance a big chunk of the region’s exports.

Still, the hit to China will be relatively modest: it is forecast to grow 8.2 per cent this year, down from the fund’s earlier projection of 9 per cent.
U.S. policymakers should take steps to rein in the long-term costs of government health programs and Social Security, the IMF said. But those cuts should be phased in over the long-term. Immediate cuts could slow the economy further.

One reason the IMF expects the US economy to remain sluggish is because governments at all levels will likely cut back on spending.

The IMF assumes the Social Security payroll tax and extended unemployment benefits will extended for the full year. Last month, Congress agreed to extend them only until February. Without a full extension of both measures, the US economy will fare much worse, the IMF said.

The IMF’s projections followed a similar mark-down in global growth estimates last week by the World Bank.

Read: Lagarde: Deeper integration necessary to end euro crisis

More: IMF set to raise $500bn in bid to boost lending power

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