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Eurozone risks force IMF to slash global growth forecast

(Xinhua)

10:17, January 25, 2012

WASHINGTON, Jan. 24 (Xinhua) -- The International Monetary Fund (IMF) sharply lowered its 2012 global economic growth forecast to 3.3 percent in the face of the escalating eurozone debt crisis.

The new estimate is 0.7 percentage point lower than the IMF's forecast in its September 2011 World Economic Outlook (WEO) report. The IMF also downwardly revised its 2013 world economic growth forecast to 3.9 percent, 0.6 percentage point lower than its September estimate.

"This is largely because the euro area economy is now expected to go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank de-leveraging on the real economy, and the impact of additional fiscal consolidation," the IMF said in the update of its flagship WEO report.

The global lender predicted the eurozone economy would contract 0.5 percent this year before returning to meagre growth of 0.8 percent in 2013.

Growth in developing economies was also expected to moderate due to the worsening external environment and a weakening of internal demand, the IMF said.

IMF Managing Director Christine Lagarde on Monday urged Europe to boost growth and build firewalls to insulate the world economy from a possible 1930s-style crisis.

The IMF predicted the U.S. economy would expand 1.8 percent in 2012 before firming to 2.2-percent growth in 2013. The Chinese economy was expected to ease to 8.2 percent growth in 2012 and 8.8 percent in 2013.

"The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth, while sustaining adjustment, containing de-leveraging, and providing more liquidity and monetary accommodation," according to the updated report.

Downside risks facing the global economic recovery had risen sharply, it warned, adding the most immediate risk was "intensification of the adverse feedback loops between sovereign and bank funding pressures in the euro area, resulting in much larger and more protracted bank de-leveraging and sizable contractions in credit and output."

In other major advanced economies, the key policy requirements were to address medium-term fiscal imbalances and to repair and reform financial systems, while sustaining the recovery.

In developing economies, near-term policy should focus on responding to moderating domestic growth and to slowing external demand from advanced economies, the IMF said.

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