IMF report: Global economy looks grim for 2012

IMF report: Global economy looks grim for 2012
By Howard Schneider - Washington Post
January 24, 1012

The world economy is slowing sharply, and the euro region is headed for recession this year, the International Monetary Fund predicted Tuesday in a bleak update of global conditions.

Overall, the world economy is expected to expand 3.25 percent in 2012 — down from the 4 percent projected by the IMF in the fall.

Leaders aim to hammer out a plan to save the euro, while demonstrators take to the streets to show opposition to austerity measures in cash-strapped countries.

That figure includes 8.2 percent growth in China, still the world’s most quickly expanding economy, and 7 percent in India. U.S. growth is forecast at 1.8 percent, the same as the fund projected in the fall.

In those cases and for the rest of the world, the IMF said growth was being crimped by the world’s major economic risk — the ongoing financial crisis in the euro zone.

In a trio of reports released Tuesday morning, the IMF forecast a “mild recession” for the 17-nation euro zone this year and warns that the situation could easily worsen.

In its “downside scenario,” the fund said that increasingly higher European government borrowing rates and worsening problems with the region’s banks would push the world into recession.

“The current environment ... provides fertile ground for self-perpetuating pessimism,” the fund wrote.

The agency is pressing Europe to do more to resolve its financial problems, and Tuesday’s projections bolster its case.

The forecast envisions sharp contractions in Italy and Spain, the two countries that are the main focus of efforts to stop the spread of a crisis that has already required international bailouts of three smaller nations.

In Greece, which is suffering from such crippling debt that European leaders fear the nation could default, a bailout deal remains hung up in negotiations. On Monday, euro zone leaders hit a standoff with Greek bondholders over interest rates, the Associated Press reported. Banks holding Greek debt have been asked to take a 50 percent loss and are calling for lower rates on those investments. European finance ministers, however, are insisting that Greece pay only 4 percent interest to its investors to help the nation avoid disaster.

Europe’s debt crisis has caused growing concern among IMF officials that efforts to bring the continent back to economic stability are too slow and insufficient. Also Monday, the agency’s managing director, Christine Lagarde, warned of a “1930s moment” for the world economy if Europe falls deeper into crisis, and she pressed Germany — the region’s largest economy — to contribute more money to rescue efforts.

World markets dropped on fears over the Greek deal. Euro Stoxx was down 0.95 percent; the German DAX dropped 0.77 percent; and the FTSE was down 0.76 percent.

On Wall Street, markets had dropped slightly by late morning. The Dow Jones index was down 0.35 percent, the Nasdaq down 0.45 percent, and the Standard &Poor’s was down 0.10 percent.