Euro zone economic growth will slow this year and next as fallout from the summer's financial market turmoil hits housing and a stronger euro crimps exports, the International Monetary Fund said on Wednesday.
"The balance of risks to the outlook are to the downside. Deteriorating conditions in credit markets could further slow consumption and investment," the IMF said in the latest edition of its semi-annual World Economic Outlook.
The IMF forecast 2.5 percent growth for this year in the 13 nations that use the common euro currency, trimming 0.1 percentage point from its estimate in July, while it saw just 2.1 percent next year, cutting 0.4 percentage point from the earlier forecast.
The revisions reflect the impact of a stronger euro on export earnings, trade spillovers from a slower-growing United States, and tighter financial conditions stemming from the credit crunch sparked by problems in U.S. subprime mortgages.
The euro has chalked fresh record highs against the dollar in recent weeks, prompting anguished calls from some European politicians for U.S. action to strengthen its currency, but the IMF said the euro did not look particularly expensive.
"Although the euro has strengthened in effective terms, it continues to trade in a range broadly consistent with medium term fundamentals," the IMF said.
Push for "Strong Dollar"
Finance ministers and central bank chiefs from the Group of Seven industrialized nations gather in Washington on Friday to review the outlook for world growth and some European officials have said they will push for the United States to reassert its 'strong dollar' policy during the meeting.
The G7 consists of the United States, France, Japan, Italy, Canada, Britain and Germany.
That said, the IMF warned that the euro's rise could still pressure exporters in less competitive euro zone countries, naming France, Spain and Portugal.
It also warned that housing markets in some parts of the currency bloc looked even more over-valued than in the United States, where cooler housing conditions are already braking growth, and was another risk to the euro zone economy.
"In countries where house prices still seem elevated -- France, Ireland, Spain and the United Kingdom (not a euro zone member) -- growth dynamics will depend on the pace of adjustment in the housing sector in response to tightening credit conditions," the IMF said.
Should the slowdown turn out to be worse than forecast, the IMF said the European Central Bank should consider cutting interest rates, while warning that it must also stand ready to tighten policy in case growth picks up.
In any case, the ECB should stay on hold while it monitors how economic and market conditions evolve.
"In the euro area, considering the downside risks to growth and inflation from the financial market turmoil, monetary policy can afford to stay on hold over the near term.
"However, as these downside risks dissipate, some further tightening may well be required. Conversely, in the event of a more protected slowdown, an easing of monetary policy would need to be considered," it said.