The world is at risk of another recession thanks to the unresolved eurozone debt crisis, the International Monetary Fund warned yesterday.
"The world recovery, which was weak in the first place, is in danger of stalling," said the fund's chief economist, Olivier Blanchard, in Washington.
The IMF hacked back its 2012 forecast for global growth to 3.3 per cent from 4 per cent in September. And the eurozone is projected to shrink by 0.5 per cent this year thanks to public spending cuts, a credit squeeze and higher sovereign debt costs.
Italy, which has seen its bond yields spike up to 7 per cent in recent months, is expected to contract by 2.2 per cent over the next 12 months. Spain is expected to shrink by 1.7 per cent. Growth for the continent's economic powerhouse, Germany, has been slashed to 0.3 per cent, down from 1.3 per cent in September. The report also said that "downside risks" have risen sharply. It identified these as a new financial crisis in Europe, the bursting of credit bubbles in emerging markets and "excessive fiscal tightening" in the United States.
The report also warned that the global economy would be adversely disrupted by an oil shock, which could result from a conflict with Iran.
The Fund expects Britain's economy to eke out 0.6 per cent growth in 2012, slightly less than forecast by the Office for Budget Responsibility. Growth of 1.8 per cent is pencilled in for the US.
The Fund also warned of the economic danger posed by weak banks cutting their supply of loans as they attempt to beef up their capital ratios. "While some deleveraging may be unavoidable the way it is done makes a difference," it said. "Provision of credit to the real economy is most affected when banks decide to let credit lines and loans run off and curtail new loan originations."
To prevent this the IMF proposes a "macroprudential gatekeeper" to ensure that loans keep flowing. It suggests that in Europe this job could be performed by the European Banking Authority, the European Systemic Risk Board and national bank supervisors.
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