The International Monetary Fund on Monday cut its global growth forecast and warned that the outlook could dim further if policymakers in Europe do not act with enough force and speed to quell their region's debt crisis.
In a mid-year health check of the work economy, the IMF also cautioned the productive capacity in a number of emerging market economies, such as China, India and Brazil, may be lower than previously believed and future growth could disappoint.
The IMF shaved its 2013 forecast for global economic growth to 3.9 percent from the 4.1 percent it projected in April, trimming projections for most advanced and emerging economies. It left its 2012 forecast unchanged at 3.5 percent.
"Downside risks to this weaker global outlook continue to loom large," the IMF said in an update of its World Economic Outlook. "The most immediate risk is still that delayed or insufficient policy action will further escalate the euro area crisis."
The global lender said advanced economies would only grow 1.4 percent this year and 1.9 percent in 2013.
It chopped its forecast for growth in emerging economies this year and next, projecting they will expand 5.9 percent in 2013 and 5.6 percent in 2012. Both figures are 0.1 percentage point lower than in April.
The IMF cut its growth forecast for the crisis-hit euro zone to 0.7 percent in 2013, while maintaining its projection of a 0.3 percent contraction this year. It said it now believes Spain's economy will shrink both this year and next.
The IMF sharply revised down its growth projections for the United Kingdom to 0.2 percent this year and to 1.4 percent in 2013. In April, the fund said the UK economy would expand 0.8 percent in 2012 and 2.0 percent next year.
MOVING IN THE RIGHT DIRECTION, BUT ...
The fund praised measures adopted by European leaders at a summit in June as "steps in the right direction" but called for more fiscal and banking integration. It urged the creation of a pan-European deposit insurance guarantee program and a mechanism to resolve failing banks.
"The utmost priority is to resolve the crisis in the euro zone," the IMF said.
It urged the ECB to provide ample liquidity to support banks under "sufficiently lenient conditions" and nudged the central bank to further ease monetary policy.
It made clear, however, that Europe was not the only risk to the outlook.
The IMF, which trimmed its US forecasts slightly, said concerns were rising over a political battle brewing in Washington over how to avoid painful automatic spending cuts and tax increases at the start of next year.
The US faces what economists are calling a "fiscal cliff" with the scheduled expiration of Bush-era tax cuts and $1.2 trillion in automatic spending reductions— enough fiscal tightening to knock the still-weak US economy back into recession.
The nation is also expected to run into the statutory $16.4 trillion cap on its debt before the end of the year, raising the prospect of a default absent congressional action to raise it.
While financial markets believe Congress and the White House will find a way to avoid a fiscal train wreck, the IMF warned of the "potential for a significant adverse market reaction" if that consensus view began to falter.
Concerns about weaker growth have now also moved to emerging economies. The IMF said they are facing "extraordinary uncertainty" as global growth slows and investors shun riskier assets.
Earlier this year, policymakers in emerging economies were worried about large-scale capital inflows and excessive appreciation of their currencies. Those fears have given way to concerns over rapid depreciation and increased volatility in exchange rates. Currencies like the Brazilian real and Indian rupee have depreciated by between 15 and 25 percent in less than a quarter, the IMF noted.
"In emerging economies, policymakers should be ready to cope with trade declines and the high volatility of capital flows," it said.
The IMF cut its 2012 growth forecast for China 8.0 percent, down from 8.2 percent, and said it now expected growth of 8.5 percent next year, down from 8.8 percent.
It also sharply revised down its growth projections for India to 6.1 percent this year from 6.9 percent, and chopped its 2013 forecast to 6.5 percent from 7.3 percent.
Meanwhile, Africa's growth is still seen at a robust 5.4 percent this year and 5.3 percent in 2013, as the region mostly remains relatively insulated from external financial shocks.
The IMF said growth in the Middle East will be stronger this year as key oil producing countries boost production and Libya's economy rebounds from conflict in 2011, but it held its forecast for next year at 3.7 percent.