IMF urges care as Europe worries recovery may slow

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France raised its economic growth forecast for 2010 on Monday but the central banks of Germany and Italy offered more sobering readouts on the probable strength of the recovery from recession in Europe.

The predictions on growth came alongside warnings from International Monetary Fund officials of the risks that developed economies may relapse if too rapidly deprived of the huge fiscal and monetary stimulus deployed to combat the aftermath of the financial crisis.

We have to be cautious because the recovery has been fragile, IMF chief Dominique Strauss-Kahn said during a visit to Japan. He said pickups in employment and private demand should precede removal of such life support.

In France, which has suffered a relatively less severe fall in economic output than much of the 16-country euro currency area, Economy Minister Christine Lagarde announced an upgrade in 2010 forecasts for gross domestic product after a drop of some 2.25 percent last year.

The government of the euro area's second largest economy was now expecting GDP growth of 1.4 percent, which is almost twice a previously forecast 0.75 percent, due to improved international environment and demand for French products, she said.

The situation in the French economy improved toward the end of 2009 and our forecasts for the start of 2010 have also brightened, Lagarde told reporters.

GERMANY WAVERS

The news, which came as finance ministers from across the euro zone met for regular talks in Brussels, was less upbeat from two of France's major neighbors.

The Germany central bank said the pace of recovery in Europe's largest economy was slowing due to weak consumer demand, notably car sales previously buoyed by government subsidies, even if export demand was helping.

The lack of a further rise in new orders, the decline in imports and the interruption in the improvement of medium-term business expectations suggests that industry will not fully offset the loss of demand in the near future from the expiry of the car scrapping scheme, the Bundesbank said.

However, in view of further improving export expectations and increased orders in industrial sectors not directly linked to the automobile industry, the recovery process appears intact, it added.

Germany's 5 billion euro ($7.2 billion) car scrapping scheme, which offered 2,500 euros toward the purchase of a new car if owners scrapped their old one, helped boost car sales last year by around 1 million units by the time funds for the scheme ran out at the start of September.

In Italy, where the central bank said on Friday that it was expecting GDP growth of 0.7 percent this year, Economy Minister Giulio Tremonti said in remarks published by a newspaper that he was hoping for a bit better after GDP drops in both 2008 and in 2009.

Italy's economy fell by one point in 2008 and by 5 points in 2009. It could rise by 1 point or a little more in 2010, Tremonti told business daily Il Sole 24 Ore.

Much of the industrialized world including and the euro zone as a whole registered renewed GDP growth in the third quarter of 2009 after five straight quarters of recession and governments are trying to figure out when they can afford to withdraw the support provided via big government expenditure.

But economists are somewhat worried following readouts on industrial output for October and November that the recovery is already losing pace if not withering.

In Tokyo, IMF Managing Director Strauss-Kahn said it would be wise to wait for better news on jobs and consumer demand before phasing out the stimulus provided by public spending and ultra-low central bank interest rates.

The head of the IMF's European department, Marek Belka, echoed that call in remarks specific to this part of the world.

We are no longer at the edge of the abyss that loomed in early 2009, with all but a handful of Europe's economies now pulling out of recession. But it is less clear that we have reached safe ground, Belka, a former Polish prime minister, wrote in a blog note (http://blog-imfdirect.imf.org/).

Strauss-Kahn said the top priority would now become tackling the surge in public debt caused as governments across much of the world committed trillions of dollars to stave off a slump after a downturn that intensified with the collapse of Wall St investment banking giant Lehman Brothers in September 2008.

But ending stimulus prematurely could be extremely costly, leaving countries with a renewed downturn and unable to cope because they had already used up their fiscal and monetary arsenals, he said.

The best indicator (for the exit timing) is private demand and employment ... In most countries, growth is still supported by government policies. For as long as you do not have private demand strong enough to offset the need of public policy, you shouldn't exit, he said. (With reporting by Tamora Vidaillet in Paris, Jonathan Gould in Frankfurt, Jo Winterbottom in Milan, Hideyuki Sano in Tokyo; editing by Patrick Graham)

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