IMF: Growth in \'precarious\' eurozone shrinking

The eurozone crisis has deepened despite the latest firefighting and the prospects are precarious, the IMF warned on Tuesday, October 9, when it cut yet again the growth outlook for single currency area. Calling for urgent action to restore confidence, the International Monetary Fund said it sees the eurozone economy shrinking by 0.4% this year and it cut the outlook for next year by two thirds to growth of 0.2%. That implies that the eurozone economy will achieve a turnaround of just 0.6 percentage points from 2012 to 2013. Although recent actions by eurozone leaders and the European Central Bank have brought some relief on markets, even leading some to speculate that the worst may be over, the tone of the IMF assessment was grim with downside risks predominating. "Notwithstanding policy action aimed at resolving it, the euro area crisis has deepened and new interventions have been necessary to prevent matters from deteriorating rapidly," the IMF said in its latest World Economic Outlook report. "Unless more action is taken soon, recent improvements in financial markets could prove fleeting," it cautioned in the report, released in Tokyo as it began its annual meeting on Tuesday. It warned: "Until the crisis is resolved, the situation remains precarious." The IMF said it now expects eurozone output to shrink by 0.75% in the second half of this year, and a 0.4% contraction for the year. The eurozone is likely to stagnate in the first half of 2013 before growth resumes. For 2013 overall the IMF now forecasts 0.2% growth, down by a half percentage point from its July forecast. Although much of this contraction is due to eurozone states carrying out necessary fiscal consolidation, the IMF suggested that investor uncertainty about the viability of the euro has also been contributing to the crisis and holding back growth. Restoring market confidence in the viability of the euro will require "robust action" and further integration to solve the causes of the current crisis. "Anticrisis measures must be anchored by the vision of—as well as reasonably fast and tangible progress toward—a more complete monetary union," said the IMF. Biggest risk 'insufficient action' The fund urged a quick follow through on allowing EU bailout funds to directly inject cash into weak banks in order to break a feedback loop with national finances. These plans, tied to creating a single bank supervisor, are at risk of being delayed by deep disagreements among European states. The IMF urged the eurozone to go further towards a full banking union, including steps they have so far refrained from contemplating such as commonly-funded deposit-guarantee and bank resolution schemes. It called for this banking union to be underpinned by greater fiscal integration, essentially transfers from one nation to another, another hot-button within the eurozone. Noting that fiscal risk sharing is an integral component of common currency areas, the IMF said fiscal integration would also "enhance adjustment to idiosyncratic shocks while preventing them from becoming systemic." It also called for wide-ranging structural reforms throughout the eurozone to raise growth and competitiveness, which it noted would reduce the imbalances within the currency union. It warned: "The most immediate risk remains that delayed or insufficient policy action will lead to further escalation of the euro area crisis." Welcoming a new ECB policy to buy government debt, it urged the ECB to keep easy money policies in place. While fiscal consolidation must continue in the eurozone periphery, the IMF said countries not under market pressure should let so-called automatic stabilisers act fully. These stabilisers, such as government deficit spending and payment of unemployment and welfare benefits, help keep up aggregate demand during a recession. The IMF noted in particular that Germany, with the eurozone's biggest economy and which is still forecast to grow by 0.9% this year, should boost investment. The IMF trimmed its 2013 growth forecast for Germany by 0.5 percentage points to 0.9%. The IMF lowered its 2012 forecast for France by 0.2 points, but still expects it to grow by 0.1% this year. It lowered its 2013 forecast by half a point to 0.4%. Italy's outlook was cut by 0.4 points, to a contraction of 2.3% this year and 0.7% in 2013. The IMF trimmed its forecast for Spain by 0.1 point to a 1.7% contraction this year, and slashed the 2013 outlook by 0.7 points to a 1.3% contraction. Outside the eurozone, the IMF now sees Britain's economy contracting by 0.4% this year, instead of 0.2% growth it saw in July. That contrasts with a Monday report by the OECD, which said its index of leading indicators showed signs that Britain's economy is picking up. The IMF trimmed its 2013 forecast for Britain by 0.3 points to 1.1% growth. The OECD's leading indicators showed weakening growth in Germany, France, Italy and the eurozone as a whole.