IMF sees euro area recovery but says Greek debacle will take toll

The International Monetary Fund (IMF) says economic recovery in the euro area is now well under way, evidenced by a recovery in domestic demand and a modest improvement in inflation.

In its latest economic outlook report, the Washington-based fund said growth projections in most euro area countries were being revised upward on back of a more encouraging outlook.

However, it warned "unfolding developments" in Greece, which is in the process of applying for a third bailout, were likely to take a "much heavier toll" on activity than previously thought.

Instead of growing by 0.5 per cent this year, the Greek economy is now expected to contract by 3 per cent after months of Grexit-inspired uncertainty.

“Developments in Greece have, so far, not resulted in any significant contagion,” the IMF said. “Timely policy action should help manage such risks if they were to materialise,” it added.

The fund cut its global growth forecast to 3.3 per cent this year, having forecast 3.5 per cent in its previous forecast April, blaming a setback in activity in the first quarter, mostly in North America.

“Nevertheless, the underlying drivers for a gradual acceleration in economic activity in advanced economies-easy financial conditions, more neutral fiscal policy in the euro area, lower fuel prices, and improving confidence and labour market conditions-remain intact,” it said.

A continued slowdown in growth in emerging market economies reflects several factors, including lower commodity prices and tighter external financial conditions, structural bottlenecks, rebalancing in China, and economic distress related to geopolitical factors, it added.

In 2016, growth is expected to strengthen to 3.8 per cent, the fund said.

The fund said risk to global growth remained “tilted to the downside” with increased financial market volatility and disruptive asset price shifts posing as the main threats.

The IMF said it seemed Greece’s crisis and market volatility in China would not affect when the US Federal Reserve chooses to raise interest rates. “From what I read ... the Fed has more or less the same interpretation of the implications of the events in Greece and China as we do, which is that they are not of major importance for the US at this point, so it should not affect their choices in terms of monetary policy very much,” said Olivier Blanchard, the IMF’s chief economist.

He also said Greece’s possible exit from the euro zone should have limited impact on the rest of the world though he warned similar crises could happen in other countries.

With Greece racing to find a last-minute bailout from its IMF and European Union creditors, Mr Blanchard said: “In a world in which there is high debt to start, we have to be ready for episodes like this.”

Addtional reporting by Reuters