Eurozone 'back in recession this year'

IMF poised to forecast 0.5 per cent contraction and pass the hat for more funds from governments

The International Monetary Fund will next week forecast a return to recession for the eurozone in 2012, a move likely to increase the pressure on governments to contribute to its latest $600bn (£388bn) fundraising drive.

The IMF is scheduled to release its revised World Economic Outlook (WEO) estimates on Monday, with analysts expecting a sharp reduction because of the ongoing eurozone crisis. According to the Italian agency, Ansa, citing a leaked draft of the WEO, the IMF will forecast that the eurozone economy will contract by 0.5 per cent over the course of this year, with Italy shrinking by 2.2 per cent and Spain by 1.7 per cent. At the IMF's meeting in September 2011, it forecast eurozone growth in 2012 of a comparatively healthy 1.1 per cent.

The eurozone's economic engine, Germany, is projected to grow by just 0.3 per cent this year while France is pencilled in for growth of just 0.2 per cent. Global growth estimates are also likely to be slashed by the IMF on the back of a eurozone recession. According to Ansa, the IMF now estimates that 2012 global GDP will rise 3.3 per cent, rather than the previous forecast of 4 per cent. The estimates for 2013 are also predicted to show GDP growth of 4 per cent, compared with a previous forecast of 4.5 per cent growth.

In its review of Ireland's public finances the Troika – made up of the European Union, the European Central Bank and the IMF – cuts its growth forecasts for Ireland to just 0.5 per cent in 2012, down from 1 per cent in October.

The IMF this week said that it anticipated calls on its resources over the next two years by distressed member states of up to $1 trillion, and that it would require a $600bn increase in its funding resources to meet this demand. The sharp increase has been interpreted as an indication that it expects large eurozone economies such as Italy and Spain to lose market access over the coming years.

There was, however, an encouraging sign on this front yesterday as Spain successfully raised €3bn in 10-year bonds at a lower interest rate of 5.4 per cent. The European Commission welcomed the IMF's fundraising push. "This would send a very clear signal to the market," said European Commission spokesman Amadeu Altafaj.

But some other large potential donors, including the United States, warned that the IMF could not be expected to rescue the euro. "We continue to believe that the IMF can play an important role in Europe, but only as a supplement to Europe's own efforts", said a US Treasury spokesperson. "The IMF cannot substitute for a robust euro area firewall."

Meanwhile, the new German representative on the board of the European Central Bank, Jörg Asmussen, warned that the Frankfurt central bank's sovereign bond buying programme, known as the Securities and Markets Programme, must come to an end at some stage, something that could potentially increase the pressure on struggling European governments.

"The SMP is neither unlimited nor can it last forever," Mr Asmussen said in an interview on German radio. The ECB is reported to have been a heavy buyer of Italian bonds in recent weeks.

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