Business

The International Monetary Fund on Tuesday slashed its forecast for world economic growth, warning the weight of the eurozone crisis threatens to capsize the global recovery.

IMF chief President Christine Lagarde in Berlin on Monday. The International Monetary Fund on Tuesday slashed its forecast for world economic growth, saying the stall in the troubled eurozone was threatening a global recovery. (AFP Photo/Joerg Carstensen)

The IMF cautioned that sharper budget cuts by major economies in the face of slower growth could exacerbate the slowdown, and if European leaders fail to get on top of their debt crisis, global economic output could be cut by more than half.

In an update of its September economic forecasts, the IMF cut 2012 projections to 3.3 per cent from 4.0 per cent, and said the 17-nation eurozone would contract by 0.5 per cent this year.

It said global growth could pick up to 3.9 per cent in 2013, but only if market panic over eurozone fragility is avoided.

The newest forecasts are "predicated on the assumption that in the euro area, policymakers intensify efforts to address the crisis," the Fund said.

If Europe's leaders do not take strong action soon, nervous markets will press up the costs of borrowing for governments more widely, forcing them to cut spending.

In that case, world output could be cut by another two percentage points, the global crisis lender said.

"The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere," the IMF said.

"Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated."

The lowered forecast was tied directly to the euro area economy's expected fall into "mild" recession in 2012 on the back of government spending cuts and commercial banks reducing lending.

"Growth in emerging and developing economies is also expected to slow because of the worsening external environment and a weakening of internal demand," it added.

The Fund has been warning for weeks that global growth was weakening due to the European crisis.

On Monday in Berlin, IMF managing director Christine Lagarde pressed European leaders to build a stronger backstop to prevent the problems in the continent's weakest economies -- Greece, Spain and Portugal -- from pulling down others.

"We need a larger firewall," she said. "Without it, countries like Italy and Spain that are fundamentally able to repay their debts could be forced into a solvency crisis by abnormal financing costs."

The Fund warned against overly sharp budget-balancing by those countries that can afford to move slowly to reduce their deficits.

Otherwise, they will just create more drag on the global economy.

"Decreasing debt is a marathon, not a sprint," said Olivier Blanchard, the IMF's chief economist. "Going too fast will kill growth and further derail the recovery."

The recommendation was pointed at Europe's largest economies Germany, France and Britain, all of which it said would continue to grow this year, albeit at a weak pace.

Germany's economy was seen growing 0.3 per cent, France's 0.2 per cent, and Britain's 0.6 per cent.

The United States, the world's largest economy, was projected to grow 1.8 per cent in 2012.

The growth downgrades covered the entire world.

Forecast growth in central and eastern Europe was slashed sharply to 4.5 per cent due mainly to fallout from the eurozone crisis.

In China, the world's second largest economy, the IMF saw a slower, soft-landing pace of 8.2 per cent this year and 8.8 per cent in 2013.

But it warned of the risk of credit and real estate bubbles which, if the country undergoes a loss in overall confidence, could have a "very damaging" impact on economic activity.

Among the other major emerging economies, India should grow at 7.0 per cent this year and pick up slightly in 2013; Brazil 3.0 per cent; Mexico 3.5 per cent; and Russia 3.3 per cent.