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IMF Says Global Economy Still Faces Major European Risks

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IMF: Economy Facing Major Risk From Europe
Growth in emerging and developing economies will slow to 5.4 percent in 2012 from 6.2 percent last year, according to the report. Photographer: Chris Ratcliffe/Bloomberg

March 1 (Bloomberg) -- The global economy faces “major downside risks” as its recovery continues to be threatened by stresses in the euro area, the International Monetary Fund said in a report prepared for the Group of 20 nations.

The world economic expansion will slow to 3.3 percent this year from 3.8 percent in 2011, according to the surveillance report prepared for the meeting of G-20 finance ministers and central bank governors in Mexico City Feb 25-26. The euro economy is forecast to contract 0.5 percent this year, compared with growth of 1.6 percent in 2011.

“The overarching risk remains an intensified global ‘paradox of thrift’ as households, firms, and governments around the world reduce demand,” the Washington-based IMF said in the report. “This risk is further exacerbated by fragile financial systems, high public deficits and debt and already-low interest rates.”

“Advanced economies are experiencing weak and bumpy growth, reflecting both the legacies from the crisis and spillovers from Europe,” according to the report.

European finance ministers are set to support a second rescue for Greece today to avoid what Italian Prime Minister Mario Monti has described as a potential “brutal outcome” for the Greek economy. The gathering in Brussels today, before a summit of leaders from the 27-nation European Union, will review Greece’s progress on meeting the conditions of the 130 billion-euro ($173 billion) aid package, which they approved last week.

Stick to Efforts

“Euro area members benefiting from financial assistance programs should stick to the agreed consolidation efforts,” the report said. “Developments in the euro area have shown that market confidence can be quickly lost, with damaging consequences for growth and financial stability.”

In the U.S., policy makers have failed to make progress toward a credible medium-term fiscal adjustment plan, according to the report. The IMF also urged Japan to support its recovery by passing legislation on tax and social security reform.

Growth in emerging and developing economies will slow to 5.4 percent in 2012 from 6.2 percent last year, according to the report. A rapid expansion of credit has left many emerging economies more vulnerable to a sudden reversal of asset prices, the report said, with weakness in advanced economies also cited as a risk.

Separately, the report warned that the oil supply shock in the Middle East could be “large” if it is not offset by supply increases elsewhere. A sustained blockade of the Strait of Hormuz, a transit route for a fifth of the world’s oil, “would lead to a much stronger and unprecedented disruption of global oil supply,” the report said.

To contact the reporter on this story: Meera Louis in Washington at mlouis1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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