IMF warns recession in 2012 ‘cannot be ruled out’

IMF warns recession in 2012 ‘cannot be ruled out’

International Monetary Fund Europe director Antonio Borges warned that a recession in 2012 “can’t be ruled out," citing a possibility that “activity will turn downwards."

He was issuing the IMF’s economic outlook for Europe in Brussels, at a time when the Greek-triggered sovereign debt crisis has already claimed its first banking victim in Dexia with a new finance industry credit crunch punishing those most exposed to Greek debt.

The IMF still tips 1.1% growth for the euro zone next year, but admits it got earlier 2011 forecasts wrong and angled the 100-page report describing the region’s economic prospects on policy changes that would be required if a downturn is confirmed.

Borges said the international lender of last resort would recommend “changing economic policy" away from austerity and back towards US and British-style stimulus.

Citing a “far more risk-averse" mood among investors, he said the best Europe could hope for would be “very modest" growth.

Any “stall" in growth by this year’s end would demand a reversal of 2011 fiscal policy where possible, Borges said.

He said: “If ever there was a more significant recession in Europe, and I hope that is not the case but we cannot exclude it, then... all those countries with fiscal leeway might want to consider that."

He specifically ruled out Italy and Spain from turning to stimulus, but the report underlined: “The pursuit of nominal deficit targets should not come at the expense of risking a widespread contraction in economic activity."

Countries with access to funding “at historically low" interest rates “should consider delaying some of their fiscal consolidation," it said, while “monetary tightening in the cyclically more advanced economies will need to be paused or even reversed."

Ahead of new EU growth figures due out on Thursday expected to show the debt-laden currency area slipping dangerously towards negative growth, a closely-watched survey of purchasing managers showed the euro zone already flipped into reverse gear in September.

Falling to its lowest level in more than two years, the final Euro zone Composite Output Index compiled by London-based researchers Markit logged 49.1 points, compared with 50.7 in August. Any score below 50 indicates contraction.

Markit noted “faster rates of contraction in Italy and Spain accompanied by near-stagnation in France and Germany," with chief economist Chris Williamson saying the results provided “confirmation that the euro zone recovery has ground to a halt."

On Tuesday, Standard & Poor’s revised downwards its growth projections for the euro zone in 2012 and warned that “the chances of Europe plunging into a new recession now appear more likely."

It put the odds for recession at 40%, still predicting growth of 1.1% for the euro zone, down from the previous 1.8%, but only 0.5% for the key Italian economy.

US bank Goldman Sachs, for its part, predicts a “light recession" across the euro zone, although it still tips 3.5% global growth.

In late September, the IMF warned that the global economy had entered “a dangerous new phase," saying a fall back into recession for Western economies would have serious knock-on effects for the rest of the globe.

China will continue to lead with a 9.0% expansion next year, it nonetheless said.