Europe and the United States could slip back into recession next year unless they quickly tackle economic problems that could infect the rest of the world, the International Monetary Fund said on Tuesday.
The IMF said financial volatility had increased dramatically as investors worried about an escalating debt crisis in the euro zone and a weakening US recovery.
Those two regions present the biggest risks to the global economic outlook, it said, warning that political gridlock could block remedial action. The fund also called for a more ambitious plan to lower Japan's public debt.
"Policy indecision has exacerbated uncertainty and added to financial strains, feeding back into the real economy," the IMF said in its latest World Economic Outlook report.
The IMF cut its forecast for global growth to 4.0 percent for this year and next, shaving projections for almost every region of the world and saying risks remained tilted to the downside. Just three months ago it had projected an expansion of 4.3 percent for 2011 and 4.5 percent for 2012.
The IMF's message to European leaders was they should do whatever it takes to preserve confidence in national policies and the euro, and it urged the European Central Bank to lower interest rates if risks to growth persisted.
Investors have questioned Europe's ability to come up with a convincing solution to its festering sovereign debt crisis, which has rattled confidence and roiled financial markets.
On Monday, international lenders told Greece to shrink its public sector and improve tax collection to avoid running out of money within weeks, and Standard and Poor's downgraded its unsolicited ratings on Italy by one notch and kept its outlook on negative -- a move that surprised markets.
The fund cut its growth forecast for the 17-nation euro zone by nearly half a percentage point to 1.6 per cent in 2011 and even weaker conditions are seen for next year with growth of just 1.1 per cent.
Currently the single currency region is scarcely growing at a 0.25 percent annual rate.
City A.M. Reporter