Brussels: The IMF slashed its eurozone growth forecast on Tuesday and warned that the single currency bloc faces a long period of sluggish activity and dangerously low inflation which the European Central Bank must tackle.
In its latest World Economic Outlook report, the IMF said growth in the 18-nation eurozone would be 0.8 percent this year, down sharply from a previous estimate of 1.1 percent, and 1.3 percent in 2015 instead of 1.5 percent.
Recovery in the eurozone was "slow and tentative", the International Monetary Fund warned, with the fallout from the debilitating debt crisis continuing to "pose challenges to robust and sustained growth."
The bleaker outlook comes on the back of official data in August which showed that the eurozone economy had unexpectedly ground to halt in the second quarter, dousing hopes that a recovery had taken hold.
New data on Tuesday showed that industrial production in Germany, the driving force of the eurozone economy, had suddenly slowed down in August.
A main culprit for the poor recovery is anaemic investment, the IMF said, brought to standstill by indebted households and businesses still too nervous to open their pocketbooks after years of crisis.
In this context, both private and public investment are way off pre-crisis levels, the IMF said, posing the greatest downside risk to the eurozone and potentially to the global economy as a whole.
The risk "is a stalling of the recovery in the euro area, the risk that demand weakens further, and that low inflation turns into deflation," said Olivier Blanchard, head economist at the IMF.
"This is not our baseline, as we believe fundamentals are slowly improving, but, were it to happen, it would clearly be the major issue confronting the world economy."
Recent EU data puts eurozone inflation at 0.3 percent, far below the ECB`s target of just under 2.0 percent.Even the ECB has been unable to solve the wide investment gap, despite slashing interest rates to near zero and providing super cheap financing to banks to encourage lending.
But these measures have yet to deliver and with inflation still way below its near two percent ECB target, the IMF urged the central bank to go even further by buying up government debt, a policy that would face significant opposition in Germany, the bloc`s most powerful country.
"For the euro-area, the priority is to achieve strong above-trend growth and raise inflation, implying maintenance of accommodative monetary policy," the IMF said in the report.
The Washington-based institution said prospects differed across countries in the eurozone and maintained that its base scenario still forecast a "modest recovery and subdued inflation" in the medium-term.
For some countries, including ones most affected by the crisis, growth has begun to look up.
Spain, supported by exports, is expected to beat earlier forecasts with 1.3 percent growth this year.
Germany should also enjoy solid growth above the eurozone average, even if the 1.4 percent forecast is half a percentage point off earlier estimates.
More worryingly, heavily indebted Italy, where the economy contracted in the first half of this year, is not expected to return to growth until 2015.
Struggline France also is set to disappoint, reaching only 0.4 percent growth in 2014 and a still low 1.0 percent in 2015.
