Europe's recession will end in the euro zone and in Britain in the second half of 2009 but will not end so early in many of the emerging market economies on its eastern flank, the International Monetary Fund said on Thursday.
In a report that upgraded its global economic forecasts, the IMF said low inflation offered "ample room to maintain very low interest rates" and other less conventional steps central banks in advanced economies have taken to fight the worst downturn in decades.
Governments should not pull fiscal stimulus too fast either, it said in its World Economic Outlook, where it also predicted further substantial rises in unemployment.
It forecast gross domestic product (GDP) rising 0.3 percent in the 16-country euro zone in 2010 and 0.9 percent in Britain after contractions of 4.2 and 4.4 percent respectively in 2009, which amounted to substantial upgrades of previous predictions for next year.
"The pace of decline in activity appears to be moderating, but the recovery will likely be moderate during the coming quarters," said the IMF.
It forecast GDP growth of 1.8 percent across the emerging market economies of eastern Europe as a whole in 2010 after a 5.2 percent drop in 2009. But within that group it saw continued if milder recessions in the Baltics, Hungary and Bulgaria, offset by sizeable output gains in the likes of Poland and Turkey.
"The rebound in Europe is likely to be slow," the IMF said, noting that much of eastern Europe would miss out on the stronger rebounds in Asia and other emerging market economies because cross-border capital flows would remain lower for some time.
DON'T RUSH FOR THE EXIT
The Washington-based agency offered much the same advice for Europe as the rest of the world, saying more work needed to be done to clean up the banking system and warning central banks and governments alike not to rush into withdrawing stimulus measures that had pulled the economy back from the brink.
"However, as recovery takes hold, a careful exit needs to be engineered, consistent with continued support for the economy yet forestalling a rise in inflation as output gaps diminish, especially given that potential output has likely fallen," it said.
If an economy's output capacity, or potential growth, falls, it can hit the point that stokes inflation faster than before, the theory goes.
The IMF predicted a rise in the euro zone's jobless rate to 11.7 percent next year, up from a predicted 9.9 in 2009 and more than 50 percent higher than the 7.5 percent rate when the global financial crisis struck in 2007.
In Spain and Ireland, two economies hardest-hit by collapses in housing and construction, the jobless rates were predicted to hit 20.2 percent and 15.5 percent respectively next year.
In Germany, where the government has prevented anything like those kind of jobless rises by subsidising programmes that keep staff on in jobs on shorter hours, the IMF predicted a rise in the unemployment rate next year to 10.7 percent from 8 percent this year.
Its GDP forecasts for the largest economies of the euro zone in 2010 were: Germany up 0.3 percent after a drop of 5.3 percent this year, France up 0.9 percent after a drop of 2.4 percent this year, and Italy up 0.2 percent after a drop of 5.1 percent.
Euro zone inflation, based on harmonised consumer price index measures used by the EU statistics office Eurostat, was forecast to come in at 0.8 percent in 2010 after a predicted 0.3 percent in 2009, compared to 3.3 percent in 2008.
The IMF forecast British inflation of 1.5 percent next year after 1.9 this year and 3.6 percent in 2008, again based on Eurostat counting methods.
