By Simon Miller

The global economy remains at risk of the greatest slowdown since the depression according to the latest outlook from the International Monetary Fund (IMF).

Although world output is projected to grow at 3.5% in 2012 and recovering to 4.1% the following year, risks remained elevated, particularly from Europe and oil prices.

The fund said that prospects for the global economy were slowly improving but warned that Europe was going to be especially weak and unemployment in many advanced economies would stay high.

It added: "Although action by policymakers in Europe and elsewhere has helped to reduce vulnerabilities, risks of a renewed upsurge of the crisis in Europe continue to loom large, along with geopolitical uncertainties affecting the oil market."

The IMF warned that the biggest threat came from a disorderly default in the eurozone, which would trigger a “full-blown panic in financial markets”.

As a result, there was “the possibility that several adverse shocks could interact to produce a major slump reminiscent of the 1930s”.

Real GDP in the euro area is projected to contract in the first half of 2012 but then start recovering, except in Spain, Italy, Greece, and Portugal where recovery will only begin in 2013. 

The report added: "Many advanced economies outside the euro area avoided large precrisis imbalances, which helped cushion the spillovers from the euro area. But in the United Kingdom, whose financial sector was hit hard by the global crisis, growth will be weak in early 2012. Growth in emerging Europe is projected to slow sharply to 1.9 percent this year, reflecting its strong economic and financial linkages with the euro area. Europe as a whole will see projected growth of 0.2 percent in 2012 and 1.4 percent next year."

“For the past six months we’ve been on a rollercoaster ride,” said IMF chief economist Olivier Blanchard. “Our baseline is that growth is going to be slow in advanced economies; sustained, but not great, in emerging market and developing economies. But the risk of things turning bad again in Europe is high.”

Earlier today, Japan announced that it would provide $60bn in additional support to the fund that estimates that it would need over $400bn to prevent contagion if another eurozone country fell.

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