The International Monetary Fund cut its global growth forecastsas the euro area's debt crisis intensifies and warned of evenslower expansion unless officials in the U.S. and Europe addressthreats to their economies.

The world economy will grow 3.3 percent this year, the slowestsince the 2009 recession, and 3.6 percent next year, the IMF saidtoday, compared with July predictions of 3.5 percent in 2012 and3.9 percent in 2013. The Washington-based lender now sees“alarmingly high” risks of a steeper slowdown, with a one-in-sixchance of growth slipping below 2 percent.

“A key issue is whether the global economy is just hittinganother bout of turbulence in what was always expected to be a slowand bumpy recovery or whether the current slowdown has a morelasting component,” the IMF said in its World Economic Outlookreport. “The answer depends on whether European and U.S. policymakers deal proactively with their major short-term economicchallenges.”

The IMF's 188 member countries convene in Tokyo this week as lowgrowth damped by fiscal consolidation in the richest economieshurts developing counterparts from China to Brazil. As the IMFurged measures to boost confidence, uncertainties out of Europeshow no sign of abating, with leaders still divided over a bankingunion and Spain resisting a bailout.

“Confidence in the global financial system remains exceptionallyfragile,” the IMF said. “Bank lending has remained sluggish acrossadvanced economies” and increased risk aversion has damped capitalflows to emerging markets, it said.

European stocks were little changed as the region's financeministers met in Luxembourg to discuss the sovereign-debt crisis.The Stoxx Europe 600 Index slipped less than 0.1 percent at 11:02a.m. in London.

In Seoul, World Bank President Jim Yong Kim told a forum todaythat he saw mildly encouraging signs in Europe. In Tokyo, IMF ChiefEconomist Olivier Blanchard indicated that yields on Spanish andItalian bonds, which decreased after the European Central Bank'sbond-buying plan announcement, could rise if the countries don'trequest bailouts.

The IMF report called for U.S. policy makers to find analternative to planned automatic tax increases and spending cutsthat would trigger a recession. Europeans must follow on theircommitments for a more integrated monetary union, and many emergingmarkets can afford to cut interest rates or pause tightening tofight off risks to their economies, the IMF said.

“It is a call to action,” Blanchard told BloombergTelevision.

Europe's Contraction

The 17-country euro area economy will contract 0.4 percent thisyear, 0.1 percentage point worse than forecast in July, and grow0.2 percent in 2013, less than the 0.7 percent predicted threemonths ago, the IMF said.

The U.S. is seen expanding 2.2 percent this year, higher than anearlier forecast, and growing 2.1 percent next year, less thanpreviously predicted. Japan's estimate was cut to 2.2 percent thisyear and to 1.2 percent in 2013.

Spain's economy will shrink 1.3 percent next year, 0.7percentage point worse than predicted in July. German growth isseen at 0.9 percent each year, with the 2013 estimate half apercentage point less than previously forecast.

“Spain and Italy must follow through with adjustment plans thatre-establish competitiveness and fiscal balance and maintaingrowth,” Blanchard wrote in a foreword to the report. “To do so,they must be able to recapitalize their banks without adding totheir sovereign debt. And they must be able to borrow at reasonablerates.”

Growth forecasts were also lowered for emerging markets, wheredomestic factors add to external constraints, the IMF said. Brazilhad some of the steepest cuts, with growth seen at 1.5 percent thisyear from 2.5 percent and 4 percent next year.

India's economy may grow 4.9 percent this year and 6 percentnext year, lower than previous forecasts of 6.2 percent and 6.6percent respectively. China's estimate was cut by 0.2 percentagepoint each year to 7.8 percent in 2012 and 8.2 percent in 2013.

Monetary policy should remain accommodative in developedeconomies, with expectations for slower inflation giving theEuropean Central Bank “ample justification for keeping policy ratesvery low or cutting them further,” the IMF said. The Bank of Japanmay need to ease further, it said.

Other risks to the global economic outlook in the short terminclude a renewed increase in oil prices and an inability to raisethe U.S. debt ceiling, it said.

The IMF forecasts assume oil at $106.18 a barrel this year and$105.10 next year, based on the average prices of U.K. Brent, Dubaiand West Texas Intermediate crudes. That compares with estimates of$101.80 and $94.16 in July.

Japan's Trade

In economic releases in the Asia Pacific region today, Japanreported a larger-than-estimated 454.7 billion yen ($5.8 billion)current-account surplus. In Australia, business confidencerecovered in September as the prospect of interest- rate reductionsovershadowed weaker sentiment among miners and manufacturers, aprivate survey showed.

In South Korea, the central bank said today that the nation'seconomy faces increased external risks and the finance ministrysaid it will step up efforts to boost growth.

In Europe, the U.K. may report today that industrial productionfell in August, a Bloomberg News survey of economistsindicates.

Bloomberg News

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