IMF: World may "fall into recession"

IMF slashes global growth forecasts

• Eurozone GDP expected to fall 0.5% during 2012

• UK set to grow 0.6% – sharp fall from earlier 1.6% estimate

• World growth downgraded from 4.1% to 3.3%

the Guardian,

Tuesday 24 January 2012 15.10 GMT

The International Monetary Fund has slashed its growth forecasts for most major countries in 2012 and urged governments to adjust the "rhythm" of their austerity measures to avoid derailing economic recovery.

In an update of the forecasts in its autumn World Economic Outlook, the IMF said output in most major economies were, "decelerating but not collapsing". It pinned much of the blame on the debt crisis in the eurozone, where it expects GDP to shrink by 0.5% during this year.

On the IMF's central projection, "most advanced economies avoid falling back into a recession, while economic activity in emerging and developing economies slows from a high pace." It is now expecting world GDP growth of 3.3% in 2012, down from the 4.1% it forecast in September.

However, the Washington-based lender warned that these projections are "predicated on the assumption that in the euro area, policymakers intensify efforts to address the crisis".

It also called on governments to avoid imposing drastic spending cuts on already sickly economies. Fiscal tightening is necessary to correct the hefty debt burden left from the boom years, the IMF said, but it, "should ideally occur at a pace that supports adequate growth in output and employment".

"Countries with enough fiscal space, including some in the euro area, should reconsider the pace of near-term adjustment," it added, in a suggestion that will be widely viewed as aimed at Germany, which is pressing ahead with austerity measures despite its healthy budget position.

Growth for the UK in 2012 will be a paltry 0.6%, the IMF says. That's a sharp reduction from the 1.6% the IMF was expecting in September – but similar to the 0.7% pencilled in by the independent Office of Budget Responsibility.

GDP across the 17-member eurozone will contract by 0.5% in 2012 as the region enters a "mild recession", the IMF predicts – a large downgrade from the 1.1% growth it was expecting in September.

The new projections also underline the yawning divide between the healthy "core" of the eurozone, centred on Germany, and its crisis-hit periphery. Both Italy and Spain are expected to suffer two more years of outright recession in 2012 and 2013, with growth depressed by their latest drastic fiscal austerity measures.

The IMF managing director, Christine Lagarde, used a speech in Berlin on Monday to urge eurozone leaders to beef up their bailout fund, the European Financial Stability Facility, which would have to rescue Italy or Spain in the event of a budget crisis.

In a separate report also published on Tuesday, updating its Global Financial Stability Review, the IMF rammed home this message, criticising euro-leaders' plans to "leverage" the EFSF, which recently lost its AAA credit rating after France and Austria, two of its key guarantors, were downgraded.

"While some proposals to leverage the EFSF have merit, even with a plausible amount of leverage the total amount of firepower available would still likely not be sufficient to contain rising sovereign spreads under stress scenarios."

The IMF also warns that "deleveraging" by eurozone banks, which are being forced by the authorities to reinforce their balance sheets to cope with the crisis, could hit the economic recovery hard in 2012. It calls for a "gatekeeper", to assess individual banks' plans for deleveraging, and ensure that, taken together, they won't derail growth by starving Europe's businesses and consumers of credit.