IMF cuts back global growth forecast

Tiananmen Gate in Beijing, China. The IMF reduced its growth forecast for China and much of the rest of the world. (Nelson Ching / Bloomberg / July 16, 2012)

The international economy will grow even more slowly than previously expected as flagging momentum in the U.S., a fiscal crisis in Europe and tumbling demand in China and India keep the recovery lethargic, according to the International Monetary Fund.

The IMF on Monday lowered its outlook for expansion to 3.5% this year, down from its 3.6% estimate in April, and it isn’t much more optimistic for next year, when it says the global economy will grow 3.9%, weaker than the 4.1% it predicted earlier.

The forecast for 2% growth in the U.S. this year and 2.3% next year were also scaled down from previous estimates. China’s economy is expected to swell a whopping 8% this year and 8.5% in 2013, but both of those forecasts are lower than previous ones. The same is true for for India’s forecasts of 6.1% expansion for 2012 and 6.5% for 2013, both slashed 0.7 percentage points.

The Eurozone is in the midst of a recession, and will contract 0.3% this year before expanding 0.7% next year, the IMF said. Italy will contract 1.9% this year; Spain, with its devastated banking sector, will shrink 1.5%.

The Middle East and Africa, however, will see stronger growth, as will Mexico.

The IMF said its projections would have been even lower had it not assumed that European officials will continue working to create a Eurozone banking union with a central regulator. The agency also said that emerging economies must strive to make credit more affordable.

The U.S., meanwhile, must ensure that major tax breaks don’t expire early next year just as substantial spending cuts are being instituted, according to the IMF. To maintain consumer and business confidence, officials must also raise the federal debt ceiling, it said.

Otherwise, the political gridlock could cause the country to plunge off the so-called fiscal cliff, stalling growth and causing “significant spillovers to the rest of the world,” according to the IMF. The U.S. could then face another market-shaking debt downgrade.

The U.S. economy grew a paltry 1.7% last year, coming off 3% growth in 2010.

For the record, 2:30 p.m. July 16: An earlier version of this post said that the U.S. ecomomy grew 5.3% in 2010. The country's economy expanded 3% that year; the global economy grew 5.3%.

ALSO:

IMF forecast: A 'very fragile' global recovery

IMF calls U.S. recovery tepid, warns of 'fiscal cliff' ahead

China posts slowest growth in three years, fueling global concerns

Follow Tiffany Hsu on Twitter and Google+