Europe is close to slipping back into recession, the International Monetary Fund warns, reigniting fears of a eurozone crisis, writes Helia Ebrahimi.
(Anti-austerity protesters in Italy)
It also highlights the fact that Germany, the engine of European growth, is slowing – a grave outcome for the rest of the continent. Germany’s growth forecasts were stripped back from 1.9 per cent to 1.4 per cent this year, and 1.7pc to 1.5pc next year.
This is on the back of weak industrial production numbers out this morning that showed a 4 per cent slump in August, month on month, far worse than the expected 1.5 per cent fall and the biggest drop since 2009.
The IMF said the two major risks facing the region were a “stalling” recovery and the fact that “low inflation [was] turning into deflation”.
The IMF has in the past urged Germany to consider infrastructure investment to boost demand in the region. It has even suggested debt-financed investment, which many have said reveals the gathering sense of desperation.
The eurozone as a whole was downgraded from 1.1 per cent to 0.8 per cent this year and 1.5 per cent to 1.3 per cent next year.
The latest figures today from British factories show that manufacturing output is up by a meagre 0.1 per cent in August, with economists blaming the slump in demand from European markets Britain exports to.
While the UK is expected to grow by 3.2 per cent this year – maintaining its place as one of the world’s fastest expanding major economies – further problems in the eurozone would hurt growth in future years.
The IMF said that while the UK was expected to grow strongly there remained considerable slack in the economy and household debt – at 140 per cent of gross disposable income – remained high.
The IMF’s Chief Economist Olivier Blanchard warned that the eurozone’s recovery could stall, saying: “This is not our baseline, as we believe fundamentals are slowly improving, but were it to happen, it would clearly be the major issue confronting the world economy.”
Germany downgraded from 1.9 to 1.4 per cent this year, 1.7 to 1.5 per cent next year
France downgraded from 0.8 to 0.4 per cent this year, 1.5 to 1 per cent next year
Italy downgraded from 0.3 to -0.2 per cent this year, 1.1 to 0.8 per cent next year
Eurozone downgraded from 1.1 to 0.8 per cent this year, 1.5 to 1.3 per cent next year
(All comparisons are with the IMF July forecast)
Helia Ebrahimi is UK Business Editor for CNBC