IMF Predicts Recession in Europe This Year Will Slow Global Recovery

Trouble for the world economy. The IMF has lowered its global growth prediction to account for continuing weakness in Europe. They now predict that Europe will return to recession this year and that this contraction will put the brakes on world economic growth:

The IMF chopped its 2012 forecast for global growth to 3.3 percent from 4 percent just three months ago, saying the outlook had deteriorated in most regions. It projected world growth would strengthen to 3.9 percent in 2013.

The Washington-based lender said economic activity was decelerating but not collapsing. However, it warned that global growth would come in about 2 percentage points below its already soft forecast if European leaders allowed the crisis to fester.

For the first time since the debt turmoil erupted two years ago, the IMF said the 17-nation euro zone would likely slip into a mild recession in 2012, with output contracting by about 0.5 percent.

I am now guardedly optimistic about the US recovery - I have no illusions of robust growth but I think we have started the long slow climb out of the humongous hole we have dug - but the persistent headwinds blowing across the Atlantic will slow us down further and headway will be hard to make.

Interestingly, the IMF also cautions countries that are pursuing austerity measures to do so with moderation:

[The IMF] also called on governments to avoid imposing drastic spending cuts on already sickly economies. Fiscal tightening is necessary to correct the hefty debt burden left from the boom years, the IMF said, but it, "should ideally occur at a pace that supports adequate growth in output and employment".

"Countries with enough fiscal space, including some in the euro area, should reconsider the pace of near-term adjustment," it added, in a suggestion that will be widely viewed as aimed at Germany, which is pressing ahead with austerity measures despite its healthy budget position.