By Agency Reporter

Thursday, 21 Oct 2010

Europe‘s growth next year will be at levels weaker than this year‘s, according to the latest International Monetary Fund European Economic Outlook.

”Despite recent strength, however, the upswing in advanced Europe is projected to remain weak by historical standards and also compared with other advanced economies, the report said.

IMF said the surprisingly strong growth in the first half of 2010 could continue longer than expected and provide an additional short-term thrust to the recovery by boosting private demand.

It also said activity in the United States or emerging Asia might still exceed expectations and keep exports up.

It noted that exports had rebounded in countries that export capital goods, which had earlier seen a very steep drop in external demand. Germany grew at an annualised rate of nine per cent in the second quarter, driving a resurgence of exports from its main suppliers, including emerging Europe.

However, it said significant risks remained despite a slightly brighter outlook, adding that, ”global growth could very well turn out to be weaker than predicted, with a tail risk of a double-dip recession. Renewed volatility in European financial and sovereign markets is also a possibility.”

The IMF suggested that given downside risks from a weaker than expected global growth, policymakers would have to tread a thin line nursing economy back to health.

”Fiscal consolidation, while inevitable, should be undertaken in a way that minimizes the negative impact on growth; monetary policy must steer carefully between the need to normalize policies on the one hand and the necessity to mitigate sovereign market volatility and ensure bank liquidity on the other,” the report said.

Also, it noted that the stress tests done on European banks must be followed by rapid action ”to eliminate remaining weaknesses in balance sheets while continuing to safeguard lending capacity.”

According to the IMF, the outlook for emerging Europe is better, with an estimated GDP growth of 3.9 per cent in 2010 and 3.8 per cent in 2011.

”The region is now recovering on the back of resurgent exports, but domestic demand remains subdued, particularly in countries where the deflation of pre-crisis asset and credit booms has been most severe,” the report said.

But the Fund also cautioned that the fortunes of the emerging countries were also linked to their counterparts in the West.

Renewed turmoil in Western Europe could affect emerging Europe not only through trade channels; it could also hurt capital flows to the region and domestic credit growth, which would further weaken domestic demand, it said.

Source: Punch