The International Monetary Fund (IMF) has reduced on Wednesday its growth forecast for Australia to 1.8 per cent from previous forecast of 3 per cent. The gloomier outlook is part of the fund's warning of a new global recession that would hit commodity prices and lead to higher unemployment rates.

The new forecast is much lower than the Australian government's budget outlook in May and half of the Reserve Bank of Australia's (RBA) prediction. The new figures indicate it would be more difficult for the government to achieve a budget surplus in 2012-12.

The IMF also slashed growth forecast for 2012 to 3.3 per cent from 3.5 per cent.

Despite the reduced forecast, the IMF said Australia is in a better fiscal position than any developed nation and has the second lowest government debt among 28 advanced economies, next to Estonia.

The IMF also said there is a possibility that things will turn out right and may result in weak growth in advanced economics at 1.6 per cent and 4 per cent across the globe for 2011. The fund cut from its June outlook of 2 per cent for the 17-nation eurozone and 5 per cent for the global economy.

For 2012, the IMF predicts advanced economies would register a much lower 1.1 per cent expansion.

"However, this assumes European policymakers contain the crisis in the euro area periphery, that U.S. policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate," the IMF said in a statement.

The fund pushed for strong leadership to prevent another round of recession in the U.S. and eurozone.

"There is a wide perception that policymakers are one step behind the action. Europe must get its act together.... Leaders must stand by their commitments to do whatever it takes to preserve trust in national policies and the euro," BBC quoted IMF chief economist Olivier Blanchard.

Following the IMF report, the Australian dollar declined to a five-week low of U.S. 102¢ over renewed concerns about European debt and after Standard & Poor's downgraded Italy's debt rating to A+. Australian shares also declined 1 per cent.

Before the IMF released its forecast, the RBA came out with a statement that expressed concern over the global outlook and hinted of interest rate cuts if the economic slowdown would worsen.