BRUSSELS/FRANKFURT, July 27 (Reuters) – The International Monetary Fund warned on Monday that the euro zone’s prospects were modest and that more money printing than planned may be needed.
Contrasting the IMF’s relative gloom, however, German think tank Ifo reported improving confidence in the 19-country bloc’s largest economy.
The IMF, saying medium-term growth would be subdued, urged the European Central Bank to keep its money presses rolling, perhaps beyond the target late next year.
“The important thing is that the ECB intends to stay the course until September 2016 and that, we think, will be necessary,” said Mahmood Pradhan, deputy director of the IMF’s European department, referring to quantitative easing (QE).
Letting the 1 trillion euro ($1.1 trillion) plus scheme to buy chiefly government bonds run longer could be better still, he suggested. “It may need to go beyond that,” he said.
Worries about the global economy, prompted by a slowdown in China where shares slid more than 8 percent on Monday, are weighing on many countries in Europe.
Manufacturing confidence in the Netherlands, with huge exposure to international trade though several of Europe’s largest ports, slipped back in July, reflecting pessimism among companies over the prospects for the coming three months.
Finnish consumer and industry confidence also weakened in July compared to the previous month.
But the data was mixed, with the positive Ifo report on German business confidence after two monthly drops and the ECB reporting a boom in lending for home buyers, which could bolster the bloc’s economy.
The ECB also said is M3 measure of money circulating in the euro zone, which is often an early indicator of future economic activity, grew by 5.0 percent in June, in line with the previous month.
But lending to companies fell by 0.2 percent in June. This was a slower pace of decline for the 11th month in a row, but still suggested most of the ECB’s largest is going to consumers not companies.
In its report on the euro zone, the IMF said that the bloc was getting stronger thanks to lower oil prices, a weaker euro and central bank action, but that medium-term prospects were for an average potential growth of just 1 percent.
The IMF said euro area gross domestic product should accelerate to 1.7 percent next year from 1.5 percent in 2015, with inflation of 1.1 percent from zero.
IMF’s Pradhan warned, however, that “a chronic lack of demand, impaired corporate and bank balance sheets, and weak productivity continue to hold back employment and investment.”
Potential growth, at an average of only 1 percent over the medium term, was well below what is needed to reduce unemployment to acceptable levels in many countries, it said, adding that the euro area was vulnerable.
Reforms were also needed to improve labor markets and productivity. “In the euro area, the important area is structural reforms. This is where the euro area, when compared to OECD countries, for example, is lagging behind,” Pradhan said.
By Philip Blenkinsop and John O’Donnell (Reporting by Reuters Bureaux; Editing by Jeremy Gaunt)