THE EUROZONE crisis has entered a “perilous new phase” and is devastating confidence across the world, the International Monetary Fund (IMF) said yesterday as it slashed its growth forecasts.
Global economic growth is expected to come in at 3.3 per cent this year, lower than the four per cent the IMF predicted just a few months ago.
Its forecast for the Eurozone has been slashed, falling from the 1.1 per cent growth prediction it pencilled in back in September to a 0.6 per cent contraction.
The UK is now expected to grow by 0.6 per cent – faster than Germany’s 0.3 per cent, France’s 0.2 per cent and Italy’s 2.2 per cent recession – but far slower than the 1.6 per cent the IMF forecast four months ago. Of all the major economies only the US growth outlook was unchanged, holding firm at 1.8 per cent.
The sharp cuts were prompted by the escalating Eurozone crisis and its impact on the financial sector.
“Bank funding all but dried up in the Eurozone,” in the last quarter of 2011, the report said. “Lending conditions moved sideways or deteriorated across a number of advanced economies.”
Low confidence over the economic situation may lead to “self-perpetuating pessimism,” the report warned.
It argued that fiscal adjustments in most advanced economies are currently “sufficient,” and “overdoing” austerity “will further undercut activity, diminish popular support for adjustment and undermine market confidence”.
Households will have to keep deleveraging, the report said, which may dampen consumer demand for years to come.
Nonetheless, the IMF believes that coordinated global action can form the foundations of robust economic growth, with structural reforms to labour and product markets boosting potential output, it said.