IMF warns on eurozone economy as global economic growth forecasts cut

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IMF warns on eurozone economy as global economic growth forecasts cut

IMF warns on eurozone economy as global economic growth forecasts cut
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The International Monetary Fund has cut its global economic growth forecasts again.

It is the third time it has done that just this year, and is based on expected weaker expansion in core eurozone countries as well as Japan and big emerging markets like Brazil.

In its flagship World Economic Outlook report, the IMF cut its expectations for global growth to 3.3 percent this year and 3.8 percent next year. In July it had expected economic growth of 3.4 percent in 2014 and 4.0 percent in 2015.

The Washington-based body has consistently overestimated how quickly richer countries would recover from the high debt and unemployment that followed the global financial crisis.

The question now is how deep rooted are the eurozone’s problems.

IMF chief economist Olivier Blanchard told reporters: “Growth in the eurozone nearly stalled earlier this year, even in the core. And while this partly reflects temporary factors, both legacies of the past primarily in the south, and low potential growth nearly everywhere in the eurozone are playing a role in slowing down the recovery.”

Blanchard warned that recovery remains at risk of stalling with low eurozone inflation turning into deflation which would become “the major issue confronting the world economy”.

The IMF now sees a 30 percent chance of the currency bloc slipping into deflation over the next year, and nearly a 40 percent probability it could slip back into recession.

While richer countries like Britain and the United States are seeing a stronger economic expansion, the IMF downgraded its forecasts for the three biggest economies in the eurozone – Germany, France and Italy – and said it was essential richer countries maintain monetary accommodation and low interest rates.

It also lowered growth projections for Japan and Brazil, among others. The IMF said potential growth in emerging markets is now 1.5 percentage points lower than what it foresaw in 2011.

German weakness

Playing into the eurozone fears were the latest German industrial output numbers.

They fell far more than expected in August, dropping by the most since early 2009, with weak investment and slow trade.

Hope is focused on Germany – Europe’s largest economy – to drive growth throughout the region.

In Berlin the Economy Ministry tried to put the best spin on the data blaming “holiday effects” for the weak industrial production.

Germany’s economy had a strong start to the year but shrank by 0.2 percent in the second quarter. Evidence is mounting that it barely grew in the third quarter and some economists even forecast it may have contracted again.