Europe: IMF Sees Slow and Fragile Recovery
| Author | Johan Mathisen |
| Position | IMF European Department |
Faced with the crisis, policymakers stepped up to the plate and used a whole array of monetary, financial, and fiscal measures. They successfully put a floor under economic activity, eliminated the fears of a major financial meltdown, and stabilized demand, says the IMF's Regional Economic Outlook for Europe, published October 3.
"Growth is around the corner, but the recovery will likely be slow and fragile," Marek Belka, Director of the IMF's European Department, said in Istanbul.
"Demand from Asia will not be strong enough to substitute for demand from the United States. Therefore, the responsibility for recovery will rest squarely on the shoulders of the European consumer," he told a press briefing ahead of the IMF's Annual Meetings in Turkey.
In most of Europe's advanced economies, output is expected to return to growth in late 2009, albeit at very low levels. Many emerging economies should follow a similar pattern, but here the picture is more varied (see table). Countries faced with a steep decline in capital inflows will take longer to return to growth.
"To repair damage to potential growth, it's essential to press ahead with structural reforms," Belka stressed. "Our call for structural reform has become almost a platitude but in the current situation, but the need for such reforms has never been more important."
[ CHART ARE NOT INCLUDED ]
While Europe has turned the corner on the recession, the recovery will likely be slow and fragile. Due to the ongoing rebalancing of global demand, exports alone will probably not be able to drive the recovery, which in any case will be hampered by rising unemployment and scarce credit as banks continue to deleverage their balance sheets.
Even if the pickup in global trade proves stronger and longer lasting than anticipated, this could be offset by problems in Europe's highly integrated banking sector, caused by bad loans tied to the recession or overhangs of foreign currency-denominated debt in emerging Europe. Employment might also adjust slowly to the upswing, raising the prospect of a jobless recovery, something which could dent confidence and hurt consumption and investment (see chart).
The scope for recovery might also be limited by the impact of the crisis on...
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