European recession expected to slow global growth

Europe is headed for a recession this year that is expected to slow the global economic recovery more than initially predicted, the International Monetary Fund predicted Tuesday.

The IMF downwardly revised its yearly forecast — predicting global growth of 3.25 percent in 2012 — down from the 4 percent level expected in September because of the financial crisis in the euro zone. 

The forecast calls for a “mild recession” for the 17-nation euro zone this year and warns that the situation could easily worsen.

“The outlook for growth is mediocre, and it could be worse,” said Olivier Blanchard, the IMF’s economic counselor in Washington on Tuesday. 

Blanchard said that “the world recovery, which was weak in the first place, is in danger of stalling."  

"The epicenter of the danger is Europe, but the rest of the world is increasingly affected."

He said that with the right set of measures, “the worst can definitely be avoided, and the recovery can be put back on track. These measures can be taken, need to be taken and need to be taken urgently.”

Estimates for U.S. growth, despite the expected European economic downturn, were unchanged from the September prediction of 1.8 percent for the year.

The IMF expressed concern that continued cuts in spending by governments will weigh on growth and is calling on European nations to tread cautiously when considering further austerity measures, including budget cuts and tax increases, according to the IMF's World Economic Outlook. 

The reported noted that some countries, especially the United States, need to clarify their plans to reduce debts and deficits in the years ahead. 

Growth assumptions are based on Congress extending the Social Security payroll tax along with unemployment benefits through the remainder of the year, the report said. 

Congressional conferees are meeting Tuesday to discuss a way forward on a year-long deal before the two-month law expires at the end of February. 

Without a full extension of the tax cut and unemployment benefits measures, the U.S. economic recovery would likely stall, the IMF said.

"The risk of too rapid short-term adjustment stands in marked contrast to the continued lack of progress in clarifying a medium-term consolidation strategy, including the failure of the Joint Select Committee on Deficit Reduction to reach agreement on a medium-term program to strengthen public finances," the report said. 

Among the major economies, a specific concern is that political paralysis in the United States will lead to an excessively rapid unwinding of stimulus spending, according to the report. 

The United States should push ahead in formulating and implementing credible medium-term consolidation plans, because neither country can take for granted its status as a safe haven. Measures could include reforms to slow the growth of healthcare and pension spending, caps on discretionary spending, and tax system reforms to boost fiscal revenue.

"Putting in place credible medium-term plans also will create policy room to support balance sheet repair, growth and job creation," the report said. 

The report also showed that China's economy will grow at an 8.2 percent rate while India will see a 7 percent expansion. 

In a speech in Berlin on Monday, IMF Managing Director Christine Lagarde laid out the main elements of a policy path forward and is urging European policymakers to implement a financial package that includes measures agreed to at the October and December euro zone summits.  

"Europe, which is at the center of global concerns, needs stronger growth, larger firewalls, and deeper integration," she said. 

Lagarde said the IMF was ready to help and seeking to increase its lending resources by up to $500 billion.

"It is not about saving any one country or any one region," she said. "It is about saving the world from a downward economic spiral."