The International Monetary Fund raised its European growth outlook in a report released today, saying a strong policy response lessened the impact of the sovereign debt crisis on the region's economy.
"Unprecedented liquidity and credit support, new European financing instruments, and substantial fiscal action in affected countries arrested the financial turmoil, moderating its adverse impact on Europe's economic activity," the IMF said in its World Economic Outlook.
The Fund raised its 2010 gross domestic product growth forecast for the euro area to 1.7 per cent from 1 per cent in July and upped its 2011 forecast to 1.5 per cent from 1.3 per cent.
"The recovery has finally gained some vigour, but it is still likely to be moderate and uneven," the IMF said, with "pronounced" differences in economic prospects across the region.
The differences depend on the state of public and private sector balance sheets and to what extent economic policies can support the recovery, it said.
Recent data have highlighted a two-speed recovery in Europe with the largest euro zone economies, Germany and France, performing far better than struggling peripheral countries like Greece and Ireland.
The IMF said risks to the outlook have become more balanced, with some upside risk - most notably from higher-than-expected real activity in Germany - emerging.
For the United Kingdom, the IMF forecast 2010 growth of 1.7 per cent and 2011 growth of 2 per cent, with domestic demand expected to be subdued due to government steps to rein in the budget deficit.
Economists expect the Bank of England to keep rates at 0.5 per cent at its October 6th-7th meeting, and most see rates staying on hold until at least July 2011. But fewer than a third see the BOE pumping more cash into the economy - known as quantitative easing - in the next six months.
The IMF said monetary policy should remain "very supportive" in most European economies for the foreseeable future.
The European Central Bank cut its key refinancing rate to a record low 1.0 per cent and has injected liquidity through extraordinary funding measures in an effort to bolster the economy of the 16-country region.
The ECB extended its liquidity support until mid-January just last month, but low demand in recent auctions has pushed up market interest rates and stoked speculation the ECB might scale back its support sooner rather than later in 2011.
"If downside risks to growth materialise, central banks in advanced Europe may need to again rely more strongly on their balance sheets to further ease monetary conditions," the IMF said.
It also said Europe's financial sector must be made more resilient and its stability secured.
"Resolving banking sector issues is essential to spur lending," the IMF said.
Reuters