World Economy

IMF Warns of Eurozone Stagnation

IMF Warns of Eurozone StagnationIMF Warns of Eurozone Stagnation

The International Monetary Fund has warned that risks remain of stagnation in the eurozone area, with the medium-term outlook for growth being “subdued”.

In a consultation on the eurozone, the IMF said “high unemployment, especially among the youth; large corporate debt; and, rising non-performing loans in the banking system” are all potential risks for the area, Euobserver reported.

“Several factors cloud the outlook for growth over the next five years,” said Mahmood Pradhan, deputy director of the European department and mission chief for the eurozone. “A moderate shock to confidence—whether from lower expected future growth or heightened geopolitical tensions—could tip the block into prolonged stagnation.”

“The medium-term outlook is subdued, as a chronic lack of demand, impaired corporate and bank balance sheets, and weak productivity continue to hold back employment and investment,” said the IMF.

“Potential growth, estimated to average around only 1% over the medium term, is well below what is needed to reduce unemployment to acceptable levels in many countries. Because growth prospects are subdued and policy space is limited, the eurozone is vulnerable to negative shocks and prolonged low growth, with negative spillovers,” the organization said.

 Near-Term Prospects

However, near-term prospects for the euro area were more positive, with GDP expected to grow from 1.5% this year to 1.7% next year. However, inflation is expected to be near zero this year and rise to 1.1% next year, “reflecting a still large output gap”.

IMF directors also warned that while the reform package has passed in Greece, risks of uncertainty and volatility remain.

“Although market reaction to the recent reform package passed in Greece has been broadly positive, further episodes of significant uncertainty and volatility arising from the situation cannot be ruled out. Directors urged policymakers to use all the available instruments, if needed, to manage contagion risks that might originate from Greece,” said a statement from the directors.

Near-term prospects for the region were helped by the continued QE program from the ECB, said the IMF, which the ECB has said it will continue until September 2016. However, the IMF believes that with the outlook for inflation, QE may continue past this deadline.