The euro zone debt crisis is escalating and could derail the global economic recovery, the International Monetary Fund warned on Tuesday as it called for urgent action to restore confidence.
The IMF chopped its 2012 forecast for global growth to 3.3 percent from 4 percent just three months ago, saying the outlook had deteriorated in most regions. It projected world growth would strengthen to 3.9 percent in 2013.
However, it warned that growth this year would come in about 2 percentage points lower if Europe let the crisis fester.
The world recovery, which was weak in the first place, is in danger of stalling, IMF chief economist Olivier Blanchard said at a news conference. The world could be plunged into another recession if the European crisis intensifies, he added.
While the Washington-based lender said global activity was decelerating, not collapsing, it said the 17-nation euro zone would likely slip into a mild recession this year, with output contracting by about 0.5 percent.
The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth while sustaining adjustment, containing deleveraging, and providing more liquidity and monetary accommodation, the IMF said in its latest World Economic Outlook report.
The IMF maintained its 1.8 percent growth forecast for the United States in 2012, but cut its projection for Japan to 1.7 percent from 2.3 percent in September.
It said economic activity in advanced economies would expand by 1.5 percent on average in 2012 and 2013, too sluggish to make a major dent in high unemployment rates.
SUPPORT FOR GROWTH NEEDED
The IMF said the United States and other advanced economies would likely not escape unharmed if Europe's crisis escalated further.
Talks between private bond holders and the Greek government have foundered, raising the risk Athens could face a messy default that would touch off a deeper crisis. IMF Managing Director Christine Lagarde has called on Europe to bolster its rescue funds to erect a wall against financial contagion.
The United States and other advanced economies are susceptible to spillovers from a potential intensification of the euro zone crisis, and have homegrown challenges ... including overcoming political obstacles, the IMF said.
The fund projected a sharp slowdown in the pace of growth in emerging and developing countries and urged them to focus policies to stimulate their economies.
It now projects growth in emerging economies to reach 5.4 percent in 2012, down from the 6.1 percent it forecast in September. It cut China's growth figure to 8.2 percent for 2012, down from 9.0 percent. Chinese growth should rebound to 8.8 percent in 2013, it added.
For fast-growing emerging Asia as a whole, the IMF reduced its growth outlook for 2012 to 7.3 percent from 8 percent.
Elsewhere, the IMF said growth in the Middle East and North Africa should accelerate, driven mainly by a recovery in Libya after a nine-month civil war ended with the capture and killing of leader Muammar Gaddafi in October.
The IMF said global oil prices would likely only ease slightly in 2012 despite slowing world growth. The Fund said its baseline oil price projection was broadly unchanged since September when it forecast $100 a barrel.
Non-oil commodity prices are set to fall by 14 percent this year, the IMF said, adding that risks to prices are to the downside for most commodities.
In Africa, the global slowdown is likely to be limited to South Africa, with the region as a whole expanding by around 5.5 percent this year.
The largest impact of the slowdown would likely be felt in central and eastern Europe, which has strong trade links with the euro zone economies, the IMF said. It revised down its estimate for the region to 1.1 percent in 2012 from a previous forecast of 2.7 percent. Growth should edged up to 2.4 percent next year, the IMF added.
(Editing by Neil Stempleman and Tim Ahmann)