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IMF Downgrades Outlook For US, European Economies

International Monetary Fund Managing Director Christine Lagarde discusses "Global Economic Challenges and Solutions" in a speech in Washington, D.C., September 15, 2011.
International Monetary Fund Managing Director Christine Lagarde discusses "Global Economic Challenges and Solutions" in a speech in Washington, D.C., September 15, 2011.

The International Monetary Fund is sharply downgrading its outlook for the global economy, saying it is entering a "dangerous new phase."

The IMF said Tuesday that the recovery from the world recession has "weakened considerably," and cut its growth forecasts for almost every geographic region. It said that the overall global economy will grow by 4 percent this year and next, fueled by rapid expansion in China, India and Brazil.

The agency painted a much gloomier picture for the world's largest economy in the United States and the 17 European nations that use the common euro currency. It warned that Western nations could retreat into a recession if they are unable to reduce governmental spending and restore consumer confidence to promote economic growth.

The IMF's chief economist, Olivier Blanchard, said that "fear of the unknown is high."

The international funding agency, in its twice yearly outlook, predicted that the American economy would expand by just 1.5 percent this year, and only slightly improve to 1.8 percent next year. By contrast, as recently as June, the IMF said the U.S. economic fortunes would advance by 2.5 percent this year and a bit more in 2012.

The IMF also downgraded its prediction for the eurozone nations, based on worries that Greece will default on its international bailout loans and destabilize the region. Greece is engaged this week in negotiations with its international creditors to avoid a default, but some financial analysts say Athens could still falter in the months ahead even if it resolves its immediate funding crisis.

The agency said the eurozone economy will grow by 1.6 percent this year and just 1.1 percent in 2012, with both projections down from the IMF's June forecasts.

Blanchard said "strong policies are urgently needed" by U.S. and European leaders to reduce the risk of a sharp financial downturn. IMF officials say both U.S. and European lawmakers need to move decisively to cut governmental budget deficits. That task has proved difficult on both continents and led to European street protests against austerity budget measures and contentious, often stalemated deficit negotiations in the U.S.

The IMF economist said a proposal by U.S. President Barack Obama to cut some taxes for American workers and boost infrastructure spending could provide a short-term stimulus for the American economy. But he added that the plan must be paired with a longer-range focus on trimming the government's debt.

The IMF said that China, with a 9 percent advance in 2012, would continue to lead world economic growth. It said India would advance at a 7.5 percent pace. But the agency downgraded its predictions for Russia, Latin America, sub-Saharan Africa, the Middle East and North Africa.

Some information for this report was provided by AP and AFP.

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