IMF: Failure to act could tip Ireland into recession

Ireland is the only EU economy in an austerity programme that is not in recession, but it could become a victim of the others if eurozone and US politicians do not act, the IMF has warned.

It lays the blame firmly at the door of politicians and says that the biggest drag on the global economy now is uncertainty because of policymakers’ failure to act.

The euro area remains the most obvious threat to global growth and unless action is taken quickly, improvements in borrowing costs could be fleeting.

“Financial stress in the euro area periphery has ratcheted up. The recession in most of the periphery is increasingly spilling into other economies in the region.

“The possibility that the euro area crisis will escalate remains a major downside risk to growth and financial sector stability until the underlying issues are resolved”, adding that “all except Ireland are in recession now”.

The IMF has described Ireland’s recovery as “bumpy”. It says that the recessions in the rest of the euro area periphery have been deeper and recovery is expected to begin only in 2013.

One sliver of good news for Ireland is that once again the IMF urges that the new rescue fund, the ESM launched yesterday, can recapitalise banks and leaders create a banking union and says this could increase growth.

The IMF cut its forecast for global growth next year from 2% to 1.5% for developed countries and from 6% to 5.6% for fast-growing emerging markets, and warns this could be even lower if politicians don’t act.

But even this forecast rests on two crucial policy assumptions — that European policymakers get the euro area crisis under control and that policymakers in the US take action to tackle the fiscal cliff, preventing automatic tax increases and spending cuts.

“Failure to act on either issue would make growth prospects far worse,” it said, adding that growth has been hit by cuts to government spending and increased taxes.

While the cutbacks may be needed, their effect is spreading out and affecting an increasing number of areas including potential bank recovery, the IMF has outlined in its global economic outlook unveiled in Tokyo ahead of the IMF-World Bank 2012 annual meetings.

Central banks keeping interest rates low and buying government bonds is the main force for growth, but it’s not working because investors and the public are worried and uncertain about the future, the report says.

Politicians and policy makers especially in the euro area shifting between taking action to reduce risks one day and making announcements that set things back the next are having the effect of switching on and off capital flows.

However, it says that there is now a clear change in attitudes in the euro area and a new architecture is being put in place. But it warns that this must mean that the euro area must be responsible for recapitalising any banks, rather than by individual governments.

“It is good to see these issues being seriously explored and to see some of these mechanisms being slowly put together,” said Olivier Blanchard, IMF chief economist.

Spain and Italy need to be able to borrow at reasonable rates, while they must be able to have their banks recapitalised without adding to the national debt.

More than 10,000 finance ministers, central bankers, private sector executives, academics and journalists gather in the Japanese capital for the meetings.