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The International Monetary Fund has slashed its forecast for world economic growth in 2012 due to the struggling euro zone's two-year-old debt crisis.
LONDON, UK – The International Monetary Fund (IMF) has slashed its forecast for world economic growth in 2012, saying the global economy is “deeply in the danger zone” due to risks from the troubled euro zone.
The Washington-based lender predicts that the world’s economy will grow by 3.25 percent this year, down from an earlier forecast of 4% in September, according to the BBC.
However, it warned that its projections were “predicated on the assumption that in the euro area, policymakers intensify efforts to address the crisis,” the Guardian reported.
The IMF predicted that the 17-member euro zone is set for a “mild recession” this year and will contract by 0.5 percent rather than growing by 1.1 percent as previously forecast.
Blaming much of the gloomy outlook on the two-year-old debt crisis raging in the euro zone, the IMF called on governments not swamped in fiscal emergencies to avoid overly cutting spending – which could see the situation deteriorate further – and to ensure instead that cuts “occur at a pace that supports adequate growth in output and employment.”
The IMF said world economic growth could possibly pick up to 3.9 percent in 2013, but only if market panic over fragility in the euro zone is averted, according to the AFP.
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Declining market confidence could lead to higher interest rates for even more governments and force them to chop spending.
Growth estimates for the main euro zone countries, including Germany, which is viewed as the bloc’s powerhouse, have been trimmed back, the BBC reported.
Germany is predicted to grow 0.3 percent in 2012, down from the 1.3 percent originally forecast last year, while France’s forecast for this year has been cut from 1.4 percent to 0.2 percent.
Yesterday IMF Managing Director Christine Lagarde called on European governments to significantly boost the size of their emergency bailout fund in order to prevent Italy and Spain sliding towards default and destabilizing the global financial system.
However, Germany has resisted pressure to beef up the euro zone’s future rescue fund, the European Stability Mechanism (ESM), with German Chancellor Angela Merkel telling a press conference in Berlin on Monday that “the priority now is to get the ISM into operation, to conclude negotiations and see how much capital we will pay in.”