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IMF Says Eurozone Growth Could Be Worse Than Expected

FILE - A sign displaying the euro symbol is seen on a shop window in Dublin, Oct. 22, 2014.
FILE - A sign displaying the euro symbol is seen on a shop window in Dublin, Oct. 22, 2014.

The International Monetary Fund on Wednesday warned of downside risks to its growth projections for the eurozone, and it urged the European Central Bank to act if prices in the currency bloc continue to drift lower.

The IMF's warning echoes an increasing fear among global policymakers that Europe is not on track to spur economic growth, something that should be a key topic for discussion when leaders of the Group of 20 economies meet in Australia this week.

The IMF, the Washington-based lending institution charged with policing global economic and financial stability, in October predicted the eurozone would expand 0.8 percent this year and 1.3 percent next year.

But disappointing data in the last month have put even those modest economic projections in doubt, including "surprisingly" weak data for domestic demand in Germany, the eurozone's biggest economy, the IMF said in a report prepared for the G20 meeting.

Close to recession

The 18-nation eurozone is skirting close to recession, and a report on Friday is expected to show economic growth in the third quarter is in line with the 0.1 percent pickup posted in the prior three months. Prices have risen just 0.4 percent over the past year.

The ECB has a mandate to keep inflation below but close to 2 percent.

The IMF said it welcomed recent moves by the ECB to keep interest rates low and pump more money into the region's banking system.

"But if the inflation outlook does not improve and inflation expectations continue to drift down, the ECB should be willing to do more, including purchases of sovereign assets," the IMF said in its report.

Divergent bank policies

It also warned of the risks tied to geopolitical tensions in Ukraine and the Middle East, and of financial market corrections due to divergent policies from the world's major central banks.

The U.S. Federal Reserve last month decided to end its bond-buying stimulus program, while the Bank of Japan has dramatically increased its pace of money creation and the ECB agonizes over whether to follow suit.

A deep stock market sell-off in mid-October also spooked policymakers concerned that a market rout could hurt confidence.

"The recent increase in volatility is a reminder about the challenges ahead," the IMF said.