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IMF warns Europe against troubling economic headwinds

IMF warns Europe against troubling economic headwinds

(5 November 2019 - Europe) The International Monetary Fund (IMF) has warned Europe to prepare emergency plans for an economic slump as risks to the region’s outlook spread and monetary policy fails to provide further stimulus.

The Bank of England has warned that weak global growth and trade barriers created by the government's Brexit deal will hit the UK economy as two Bank policymakers called for an immediate interest rate cut to support growth.

The warnings follow economic data showing that the European Union (EU) economy is proving more resilient than anticipated, driven by robust expansion in countries such as France. Despite this, Germany likely experienced a technical recession in Q3 2019 while the labor market in the continent’s largest economy started to deteriorate.

If the UK leaves the EU in January 2020 without an orderly withdrawal agreement, the country’s economic output would be 3.5 percent lower in two years according to the IMF’s forecast. The EU economy would contract by 0.5 percent in that scenario.

The European Central Bank (ECB) new head Christine Lagarde, ex-head of the IMF, is being encouraged to look at a new measure for inflation. The ECB’s official gauge of consumer-price growth is viewed as grossly under-represented housing costs by only including residential rents, ignoring the 66 percent of homes that are owner-occupied. “Economic relationships and trends shift. Policy reactions that were appropriate two decades ago are no longer valid” Christine Lagarde said at a farewell event for her predecessor, Mario Draghi.

“Given elevated downside risks, contingency plans should be at the ready for implementation in case these risks materialize, not least because the scope for effective monetary policy action has diminished. A synchronized fiscal response may be necessary” the IMF stated in its Regional Economic Outlook for Europe.

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