Europe’s debt crisis could tip the world economy into recession and a bigger firewall is urgently needed to keep the damage from spreading, the IMF said on Tuesday.
The IMF chopped its estimate for global growth to 3.3 percent this year from 4 percent just three months ago and warned it could drop as low as 1.3 percent if Europe lets the crisis fester for much longer. For next year, it predicted growth of 3.9 percent.
“The epicenter of the danger is Europe, but the rest of the world is increasingly affected,” IMF chief economist Olivier Blanchard said at a news conference. “There is an even greater danger, namely that the European crisis intensifies, and in this case the world could be plunged into another recession.”
“With the right set of measures, the worst can definitively be avoided and the recovery can be put back on track,” he said. “These measures can be taken, need to be taken, and need to be taken urgently.”
The IMF called for swift action from the 17-nation eurozone, which it said would likely see its economy contract this year by 0.5 percent.
“The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth while sustaining adjustment, containing deleveraging, and providing more liquidity and monetary accommodation,” it said in its latest World Economic Outlook report.
Blanchard and other top IMF officials emphasized repeatedly that Europe needs to bolster its rescue funds to win market confidence and lower yields on sovereign bonds so that countries like Italy and Spain can borrow at affordable rates.
Talks between private bond holders and the Greek government have foundered, raising the risk Athens could face a messy default that would touch off a deeper crisis. IMF Managing Director Christine Lagarde warned on Monday that a failure to erect a larger wall against financial contagion could lead to a “1930s moment.”
Jose Vinals, director of the IMF’s Monetary and Capital Markets Department, said it was important to both increase the size of the Europe’s current 500 billion euro rescue fund and its flexibility.
In addition to helping countries it should be able to take direct stakes in troubled banks “to break the link between national sovereign risk and national banks,” he said.
The IMF maintained its 1.8 percent growth forecast for the US this year, but said a pick-up in spending could be offset if the turmoil in Europe grew.
It also cut its projection for Japan to 1.7 percent from September’s 2.3 percent and urged Tokyo to be more ambitious in reducing its debt and implementing a consumer tax.
Economic activity in advanced economies would expand by 1.5 percent on average this year and next year, too sluggish to make a major dent in high unemployment rates, the IMF said.
Emerging nations are also feeling the pinch.
The IMF projected growth in emerging economies to slow to 5.4 percent this year, down from 6.2 percent last year and well below the 6.1 percent forecast in September, and it called on them to focus policies on lifting growth.
It cut China’s growth figure to 8.2 percent this year, down from 9 percent. Chinese growth should rebound to 8.8 percent next year, it added.
For fast-growing emerging Asia as a whole, the IMF reduced its growth outlook to 7.3 percent this year from 8 percent.