IMF Downgrades Global Growth Forecast to 3.5% for 2012, 3.9% for 2013

The stifling effect of Europe's sovereign debt crisis and weakness in developing nations led the International Monetary Fund (IMF) to downgrade its global growth forecasts on Monday to 3.5 per cent for 2012 and 3.9 per cent for 2013.

The forecast is contained in the IMF's World Economic Outlook released on Monday. The outlook warned that Europe's debt crisis would likely continue and cause a significant risk to the global economy. Since Europe is the key risk to the global economy, the IMF urged the region's leaders to work for more progress on banking and fiscal union.

"In the past three months, the global recovery, which was not strong to start with, has shown signs of further weakness," the IMF said.

"Financial market and sovereign stress in the euro area periphery have ratcheted up, close to end-2011 levels," it added.

The IMF said that the eurozone leaders' summit in June was a step in the right direction but pointed out that downside risks remain due to the high unemployment rates above 20 per cent among young people in Greece, Portugal, Spain and Ireland.

While the fund acknowledged that growth momentum has slowed in China, which reported last week a three-year low growth at 7.6 per cent, the IMF was optimistic with the world's second-largest economy and forecast expansion rates of 8 per cent for 2012 and 8.5 per cent for 2013 for Beijing.

The IMF had no specific forecast for Australia, but downgraded its forecast for the other advanced economies to a 2.4 per cent to 2.6 per cent growth for 2012 and 3.4 per cent to 3.5 per cent expansion for 2013.

Commenting on the IMF report, Australian Treasurer Wayne Swan said the fund's assessment showed that the country's economic fundamentals are strong compared to the rest of advanced economies.

"Despite headwinds from ongoing global turbulence, the high dollar and structural changes underway, the Australian economy is in a league of its own," Mr Swan said in a statement.

"We have the best combination of impressive growth, low unemployment, a record investment pipeline, contained inflation, and low interest rates," he added.

Canberra's forecast is that the country would log a 3.25 per cent growth for 2012 and 3 per cent expansion in 2013.