The IMF has warned that the stronger economies in Europe should avoid drastic budget cuts that cost the country in growth. Cuts should be delayed if situations get worse in the UK, Germany, or France, due to the “historically low” interest rates at which the countries can borrow. A recession in Europe for 2012 was not ruled out completely.
Service Sector Falls
A Markit PMI survey from last month showed shrinkage in the service sector for the eurozone. According to the IMF report, “[This] will require some difficult decisions to improve crisis management and a demonstration of unity behind the project of economic and monetary union that will convince markets. The pursuit of nominal deficit targets should not come at the expense of risking a widespread contraction in economic activity.”
The IMF still predicts growth for 2012, but suggests that the growth will be fairly low. However, if economies begin to reverse, IMF director for Europe, Antonio Borges suggested that those with “fiscal leeway” reconsider fiscal policy changes.
The eurozone’s economic recovery’s weakness was also shown in the data from the Markit/CIPS Services Purchasing Managers’ Index for September, which saw a drop to 48.8 to its lowest reading since July 2009. In August the index was 51.5 and a reading under 50 shows contraction.
A Spreading Out
According to Markit, the service sector dropped in smaller members of the 17 countries of the eurozone first, before moving onto the entire group. Chief economist at Markit, Chris Williamson, said, “The malaise is spreading to the core, where surging rates of expansion earlier in the year have turned rapidly into contraction in Germany and only very modest growth in France.”
As many of these countries rely on their service sectors for their economies to grow, this news will mean less growth for the year. This news comes as the government stuck by their plans for growth, with Prime Minister David Cameron and Chancellor George Osborne maintaining that it was necessary for the UK to stay above water in this crisis. The government has been criticized by Labour, who agree with the IMF that larger economies should reconsider fiscal policies on cuts and austerity.