IMF: Eurozone to stumble, causing global recovery to sputter

By Matthew Rusling (dpa) Jan 24, 2012, 15:01 GMT

Washington - The eurozone economy will lose its footing this year, slipping into a mild recession that will lead to a slowdown in the world's recovery from the worst downturn in decades, the International Monetary Fund said Tuesday.

The euro area crisis entered a 'perilous new phase' in last year's fourth quarter, the Fund said in its World Economic Outlook, a gauge of the globe's economic health.

The IMF projects that the euro area economy will contract by 0.5 per cent, compared to 1.6 per cent growth in 2011.

The eurozone spillover will impact the world economy, and the Fund has revised downward its 2012 global growth forecast to 3.3 per cent - a 0.7 per cent reduction since its September prediction.

Despite a short-lived global economic boom in last year's third quarter, factors such as a construction boom in Japan following a massive earthquake are 'not expected to sustain significant (global) momentum going forward,' the report said.

Developed economies, which include the United States, Germany, Japan, France, the UK and Canada, are to expand by an average of 1.5 per cent between 2012 and 2013, a rate too sluggish to make a dent in high jobless rates, the IMF said.

Over the same period, growth in emerging economies is predicted to slow to 5.4 per cent this year, a 'significant' drop from an average of more than 6 per cent between 2010-11. The change reflects an overall global slowdown, as well as a drop in domestic demand in key emerging economies, the report said.

Asia's developing economies, which include India, China, and ASEAN-5, are projected to expand at an average of 7.5 per cent in 2012-13, although they, too, will see slowed growth.

Among those countries, China comes first at 8.2 per cent growth this year, down from 9.2 per cent last year. India's growth is projected to slow in 2012 to 7 per cent, down from last year's 7.4 per cent. ASEAN-5 - comprising Indonesia, Malaysia, the Philippines, Thailand and Vietnam - are to grow 5.2 per cent, up from last year's 4.8 per cent but revised downward by 0.4 per cent from September.

Aside from concerns with the European debt crisis, there are also geopolitical concerns over the world's supply of oil amid escalating tensions between the US and Iran in which the Islamic state threatened to block the Strait of Hormuz, a major thoroughfare for oil. On Monday, the European Union approved an unprecedented oil embargo, also aimed at Iran's nuclear programme.

The impact of an Iran-related supply shock on the global economy would be 'large,' the report said.

There is some good news, however, as the projections see global economic activity 'decelerating but not collapsing.'

Developed countries outside the eurozone are expected to avoid spiraling back into recession, while emerging economies will 'slow from a high pace,' although those predictions are based on the IMF's assumption that eurozone policy makers will strengthen efforts to address the widening debt crisis.