The International Monetary Fund reduced global economic growth forecasts for the year to 3.25 percent from its 4 percent last fall and warned that the euro zone debt crisis could push the region back into a recession.
The IMF said the world economy is slowing and that inaction by European leaders on the sovereign debt crisis could cause the euro zone’s economy to contract 4 percent over the next two years. The institution projects growth rates of 8.2 percent in China, 7 percent in India and 1.8 percent in the United States. The projected U.S. growth rate was the same as the IMF projected last fall.
The IMF forecast a “mild recession” for the 17-nation euro zone this year and said its “downside scenario” envisions rising European government borrowing rates and worsening problems for the continent’s banks could cause a global recession.
“The most immediate risk is intensification of the adverse feedback loops between sovereign and bank funding pressures in the euro area,” the IMF said in its updated World Economic Outlook. This would force “larger and more protracted bank deleveraging and sizeable contractions in credit and output,” the IMF said.
IMF chief Christine Lagarde has been urging euro zone leaders to contribute more money to rescue efforts, implement pro-growth policies and further integrate the monetary union.