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Domestic demand will support the euro zone despite ‘pronounced’ slowdown, IMF says

The International Monetary Fund (IMF) has admitted it was “surprised” by the extent of the recent slowdown in the euro zone, but expects growth to pick up again.

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The euro zone economy has struggled with changes in domestic policies in Germany, social unrest in France, and weaker external trade. However, some of that pressure has started to ease and domestic demand should drive further growth, Poul Thomsen, director of the IMF’s European Department, said Friday.

“The European slowdown … has been pretty pronounced. We expected some slowdown, growth had been above potential for a while, it’s quite a mature recovery, (but) we were surprised by the softness and the depth of the slowdown,” Thomsen told CNBC’s Joummana Bercetche at the IMF’s Spring Meetings in Washington, D.C.

The European Central Bank (ECB) said in early March that it has seen a “sizable moderation in economic expansion that will extend into the current year.” This led the central bank to slash its growth forecasts for this year to 1.1% from a 1.7% estimate last December. At the time, ECB President Mario Draghi said geopolitics, protectionism and vulnerabilities in emerging markets were denting economic sentiment.

Thomsen said Friday that in addition to Draghi’s main concerns there are also temporary factors impacting the euro zone, such as the social unrest in France and changes to car emission rules which had impacted Germany’s auto sector.

However, the IMF representative said he remained hopeful about the upcoming months, noting “temporary factors that we already see unwinding.”

Thomsen said he expected domestic demand “to drive the recovery going forward,” helped along by a positive labor market, current oil prices and the support of monetary policy,

Also speaking to CNBC at the IMF Spring Meetings was Klaus Regling, the managing director of the European Stability Mechanism. Regling said that while growth in the euro zone is not going to be as strong as in 2017, the region is far from being in a recession.

“We will not see in the next two, three years the growth rates of 2017. It’s quite OK to say that the best is over, but it doesn’t mean that there is a crisis,” he said.

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