IMF sees slower European growth

14:12, 21 April 2008
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Eastern European countries would be "especially vulnerable"

The International Monetary Fund said Monday that the global credit crisis and persistent gloom over the U.S. economy have dampened the outlook for European economic growth, according to AP.

"Europe has so far been relatively resilient to the U.S. slowdown and the global financial turbulence, but the historical record suggests these will increasingly take their toll," said Michael Deppler, director of the IMF`s European Department.

The IMF forecast that the fallout from the credit crisis would combine with the near-record strength of the euro and soaring food and energy prices to knock inflation-adjusted GDP growth across Europe to 2.6 percent this year from 3.9 percent last year "with growth rates in the advanced economies projected to fall well below potential for some time."

The IMF broke down its forecast in two categories. The first was advanced European economies, including the 15-nation euro zone, Denmark, Sweden and Britain. The second was emerging European economies, including Russia, Croatia, Albania, Turkey and Ukraine, among others.

The agency said that the advanced European economies would see a decline in real growth to 1.5 percent this year from 2.8 percent in 2007. The emerging economies` GDP would drop to 5.5 percent from 6.9 percent in 2007.

In the euro zone, GDP is expected to be at 1.4 percent this year and 1.2 percent in 2009.

"The sharp rise in inflation, which has already dampened consumer confidence and spending in Europe, is a further source of weakness," Deppler said.

The IMF outlook, in an annual report, comes with inflation in the 15-nation euro zone — which is home to more than 317 million people and accounts for more than 15 percent of the world`s global domestic product — running at 3.6 percent, its highest level in 16 years.

The IMF cautioned that a "further appreciation of the euro" and the threat of the credit squeeze exploding into a full-blown crunch were issues, though the risks should not be exaggerated.

Among the most vulnerable countries are those that are seeing a cooling of once-hot real estate markets, particularly Britain and Spain.

"Risks are greater in countries that are going through a correction in housing prices, though this factor is mitigated in Europe by the limited reliance of households on borrowing against home equity collateral," the IMF said.

Also vulnerable are emerging economies — such as eastern European countries — with large current account deficits and high external debt because they would be "especially vulnerable to shifts in investor confidence."


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