IMF says Europe's recovery is spilling over to rest of world

[FRANKFURT] The global economy can thank Europe's robust growth for the improving outlook, according to the International Monetary Fund said.

Forecasting 2.4 per cent expansion in the region this year, up from 1.7 per cent in 2016, the Washington-based lender said the brighter prospects accounted for the bulk of an upward revision to its global outlook published in October. It also said the difference in growth rates within the 19-nation euro area is the lowest in nearly two decades.

"This recovery in many countries of Europe is now increasingly solidifying and strengthening," Jorg Decressin, deputy director of the IMF's European Department, said at a briefing for its Regional Economic Outlook, published Monday.

The region has benefited from years of unprecedented monetary stimulus that has helped reduce unemployment and bolster private consumption. But the IMF said that the "sustainability of the rebound remains in question" in the long term amid adverse demographic trends and subdued productivity.

For the near term, though, there are "upside risks," Mr Decressin said.

"There could be a stronger recovery globally, but also a stronger recovery of domestic demand within Europe, especially in those Eastern European economies where we are seeing increasingly rapid wage growth," he said.

Already, Europe's improved demand is boosting world trade. According to the IMF, Europe's contribution to the growth of global merchandise imports in 2016-17 is similar to that of China and the U.S. combined. One outlier is the UK, where demand has slowed after the pound's depreciation lifted inflation and squeezed real incomes.

Europe's strengthening momentum should help to generate inflation pressure after many developed economies grappled for years with low price growth. Output gaps in the region's advanced nations are closing, a milestone already largely achieved in emerging Europe, the IMF said.

Although central banks should be ready to gradually withdraw stimulus where wages have accelerated, the IMF cautioned that policy makers should be patient and allow this trend to prove durable.

"For the euro area and most of advanced Europe, subdued underlying inflation points to the need for monetary policy to remain accommodative for an extended period," it said.

It added that for the ECB to reach its medium-term inflation objective, stronger economies will have accept faster inflation rates for some time.

BLOOMBERG