IMF: Eurozone to remain in recession in 2013

The eurozone will stay in recession in 2013 with the currency area’s economy contracting by 0.2 percent, the International Monetary Fund predicts.

“The euro area continues to pose a large downside risk to the global outlook,” the Washington-based crisis lender said in a quarterly update of its World Economic Outlook on Wednesday.

“In particular, risks of prolonged stagnation in the euro area as a whole will rise if the momentum for reform is not maintained.”

Euro area bailout recipients Greece, Portugal and Ireland, as well as struggling economies including Spain and Italy, where governments are trying to fix large budget deficits, must continue to push through both fiscal and structural reforms, the IMF said.

The weaker economies on the eurozone periphery “must be supported by the centre” through the European Union’s firewalls along with continued steps toward full banking union and budget integration, the IMF update said.

Globally, growth will increase to 3.5 percent this year, led heavily by emerging and developing economies.

The world’s advanced economies as a group will grow by 1.4 percent in 2013, down 0.2 percentage points since the IMF’s October projection, due to the worsening outlook in Europe, the IMF said.

Global growth is “not enough to make a dent in the unemployment rates” in rich countries, chief economist Olivier Blanchard said. unemployment in advanced economies is likely to continue to average around 8 percent.

The United States is projected to expand by 2 percent, speeding up to 3-percent growth in 2014. Growth in 2012 “surprised on the upside” in the US, reaching 2.3 percent, the IMF said.

Fiscal cliff 

The US was able to dodge the worst of the so-called fiscal cliff when the Congress passed legislation to avoid most of the scheduled 2013 tax hikes and postpone major spending cuts.

Politically divided Washington still needs to devise a medium-term solution to its debt problems, the IMF urged.

Noting the policy progress made by politicians in the US and Europe, where steps were taken last year toward a banking union to enhance the stability of the financial system, Blanchard said: “We may have avoided the cliffs, but we still face high mountains.”

The IMF sees Japan quickly escaping its latest downturn, growing 1.2 per cent this year on the back of a large stimulus package and slashed interest rates. But it has an increasingly pressing need for medium-term deficit control and structural reforms to hike growth potential, the IMF noted.

As a group, emerging and developing economies are forecast to build on 2012’s 5.1 per cent growth to 5.5 percent this year.

“But weakness in advanced economies will weigh on external demand,” including through lower prices for commodity exporting countries.

The IMF projected China to maintain around 8 percent growth, while India can expect expansion to pick up from 4.5 percent last year to 5.9 percent in 2013.

The Middle East and North Africa can expect growth to slip from last year’s 5.2 percent to 3.4 percent, in part from easing energy prices. Sub-Saharan African growth should quicken to 5.8 percent, up 1 point from 2012.

Brazil, which was hampered last year by supply bottlenecks and policy uncertainty, grew by 1 percent in 2012 but should see a jump to 3.5 percent this year, the IMF said.