IMF predicts European recession will slow global economy

The International Monetary Fund is warning against deep budgetary cuts and extreme austerity measures.

A recession in Europe will slow the global economy this year, the International Monetary Fund predicted Tuesday, while urging world leaders to focus on growth more than budget cuts.

The IMF forecasts global growth of 3.25 percent this year, slower than the 4 percent pace it projected in September.

The 17 nations that share the euro will shrink 0.5 percent this year. In September, the IMF had predicted 1.1 percent growth for the region.

Europe's recession should have only a modest impact on the United States. The IMF projects 1.8 percent growth for the year, unchanged from its September estimate.

The IMF warns against steep budget cuts, which it says will slow growth further and undermine market confidence. The global lending organization's message runs counter to the push for budget cuts advocated by German Chancellor Angela Merkel.

In light of the weaker growth, European governments should avoid extreme austerity measures — spending cuts and tax increases — the IMF said in its World Economic Outlook. And healthier European countries whose governments are facing lower interest rates "should reconsider the pace" of their short-term budget cuts.

IMF managing director Christine Lagarde made a similar argument Monday during a speech in Berlin.

European banks, meanwhile, are cutting back on lending in order to boost their capital reserves, the fund said. That's likely to hammer Central and Eastern European economies this year, which depend heavily on European bank loans.

The cutbacks will also slow growth in many Asian economies, the IMF said, where European banks finance a big chunk of the region's exports.

Still, the hit to China will be relatively modest: It is forecast to grow 8.2 percent this year, down from the fund's earlier projection of 9 percent.

U.S. policymakers should take steps to rein in the long-term costs of government health programs and Social Security, the IMF said. But those cuts should be phased in over the long-term. Immediate cuts could slow the economy further.

One reason the IMF expects the U.S. economy to remain sluggish is because governments at all levels will likely cut back on spending. The IMF assumes the Social Security payroll tax and extended unemployment benefits will extended for the full year. Last month, Congress agreed to extend them only through February.

Without a full extension of both measures, the U.S. economy will fare much worse, the IMF said.

Lagarde warned Monday that the world economy faced the risk of a painful recession this year. She called on policymakers to avoid the stalemates that prevented Europe and the United States from resolving difficult budget and economic problems last year.

"It is not about saving any one country or any one region," she said. "It is about saving the world from a downward economic spiral."

The IMF's projections followed a similar mark-down in global growth estimates last week by the World Bank.