3ND LEAD: Europe on verge of recession, with global impact, IMF says

By Matthew Rusling Jan 24, 2012, 19:23 GMT

Washington - The International Monetary Fund Tuesday substantially revised down its growth outlook for the eurozone, predicting the currency bloc will slide into a mild recession this year in the wake of the region's lingering debt crisis.

In its latest world economic outlook, the Washington-based IMF said it expects the 17-member eurozone economy to contract by 0.5 per cent this year before gaining momentum in 2013 to expand by a modest 0.8 per cent.

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.

'The epicenter of the danger is Europe, but the rest of the world is increasingly affected,' said Olivier Blanchard, director of the IMF's research department, at a briefing in Washington on Tuesday.

He added that the world could be 'plunged into another recession' if the eurozone crisis intensifies.

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 called on the European Central Bank (ECB) to shore up confidence in the euro by pressing on with its controversial government bond purchasing program.

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.

In Latin America, the IMF slashed its 2012 growth prospects for Brazil, the world's seventh largest economy, to 3 per cent, down 0.6 per cent from previous estimates. Mexico faired better, as the world's 14th largest economy is expected to grow 3.5 per cent this year, a downward revision of only 0.1 per cent from previous estimates.

Latin America and the Caribbean are expected to grow 3.6 per cent this year and 3.9 per cent next year.

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.

On Monday, IMF chief Christine Lagarde called on European leaders to step up efforts to combat the region's long-running debt crisis by boosting the eurozone's bailout fund and launching a system of eurobonds.

The IMF chief again called for steps to ensure stronger economic growth in the 17-member eurozone as well as measures for greater integration across the region. Lagarde said the IMF was seeking to increase its lending resources by up to 500 billion dollars.