Europe's severe economic downturn is expected to continue till at least the second half of 2010 and could persist longer if governments fail to take additional measures to shore up fragile financial institutions and coordinate their response to the recession, according to the International Monetary Fund (IMF).
The IMF's update for Europe continues to strike a depressing with economies of 16 nations that use the euro currency projected to shrink 4.2 per cent this year alone. The German economy is projected to contract a massive 5.6 per cent as demand for it high-value exports expected to plummet sharply.
The IMF said the euro zone is likely to shrink about 0.4 per cent in 2010 with the German economy shrinking by another 1 per cent.
The IMF said that the emerging economies particularly those of the former Soviet bloc will likely contract 4.9 per cent this year with a return to growth of 0.7 per cent in 2010. The IMF said that risks around its forecasts remained toward the downside especially if the global demand failed to pick up.
According to Marek Belka, director of the IMF's European department, the measures adopted against the deep recession in Europe have provided a good foundation for a gradual recovery, but further actions by policy makers, particularly in the financial sector are needed to restore market trust and hasten the recovery.
Measures proposed include continued provision of liquidity, recapitalisation of institutions by both the public and private sectors and moving impaired assets from financial institutions balance sheets into a 'bad bank' backed by the state. NNBelka also said a coordinated Europan response was needed to ensure better both monetary and fiscal policies worked more effectively. He added that Europe though the most economically integrated market economy in the world had only undertaken national level policies.
Figures that will be available later this week are expected to show the recession becoming more pronounced with the euro zone shrinking 2 per cent over the January- March period from the previous three month period. The contraction would be higher than that posted in the fourth quarter of 2008.
The update notes that despite the extraordinary nature of the measures taken, the financial sector has not returned to normal. Though the money market stress has been relieved in advanced and some emerging economies, credit extension is falling and corporate bond spreads continuing to remain elevated. Non-performing loans and remained high on worsening economic fundamentals and tighter lending standards.
For emerging economies, access to foreign currency liquidity remained a key challenge while uncertainty pushed up private savings rates.
The baseline projection is one of continuing decline in output through the beginning of 2010 with a gradual recovery later in the year. Economic activity in advanced economies will follow on the projected baseline while recovery in emerging economies will be more uneven.