Two days after it downgraded global economic growth forecast, the International Monetary Fund (IMF) also cut its outlook for Australia to 3 per cent from previous forecast of 3.3 per cent.

At the same time the IMF advised the Gillard government not to attempt to achieve a budget surplus in 2012-13 despite its previous promise to Australians. The fund explained the forecast reduction and the surplus advice to the weakening global economy.

However, despite the downgrade , one of the lead authors of the report observed that the Australian government's fiscal policy was proper due to the booming resources sector in the country.

"At this stage for Australia, where you have these strong investment plans in the pipeline, where the growth prospects are still quite good, this strikes me as appropriate," IMF Research Department Deputy Director Jorg Decressin told ABC radio.

He cited Australia for being one of the few advanced economies that could weather another round of global slowdown.

The IMF on Wednesday reduced global growth forecast to 3.3 per cent for 2012 and 3.9 for 2013 due to the European sovereign debt crisis. Prior to the IMF downgrade, the World Bank downgraded on Jan 19 global growth forecast to 2.5 per cent for 2012 and 3.1 per cent for 2013. At the same time, the World Bank warned nations to brace for chaos as it expects the looming global financial crisis to be worse than that of 2008.

Both the IMF and World Bank growth projections for Australia are lower than the Reserve Bank of Australia's 4 per cent forecast for 2012 and the federal government's outlook of 3.25 per cent.

The downgrade was part of a briefing note prepared by the IMF for a G20 meeting in Mexico. Australian Treasurer Wayne Swan said that the latest IMF cut to global growth was considered in the federal government's forecast released in November. He cautioned that public debate on the growth forecast overemphasized downside risks, which in turn could affect business confidence.

Notwithstanding the IMF projection, Mr Swan said the Gillard government is sticking with its previous growth and budget surplus forecasts.

For the rest of the world, the IMF recommended that countries which could reduce interest rates should do so as inflationary pressure eases. The fund added that nations that are not burdened by very high debts should permit wider budget deficits to counter global economic slowdown.

The IMF stressed that besides the European debt contagion, the biggest risk to the global economy is that governments, businesses and households will attempt to cut their spending and debts at the same time which will create a paradox of thrift.

The fund also aired concern over the contraction of exports of emerging economies at yearly rates of 30 to 40 per cent compared to 12 months ago.

For Australian banks, the IMF recommended that it add more capital even as the fund believes Aussie lenders could withstand sizeable shocks in the mortgage market. The IMF took note of progress being made by Australian banks to meet Basel III requirements.

"Combining residential mortgage shocks with corporate losses expected at the peak of the global financial crisis would put more pressure on Australian banks' capital. Therefore, it would be useful to consider the merits of higher capital requirements for systemically important domestic banks," Australian Broker News quoted the IMF.

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