By Richard Johnstone and Nick Mann | 16 July 2012

The International Monetary Fund has downgraded its projections for world economic growth in both 2012 and 2013.

Publishing its quarterly World economic outlook today, the fund said it now expected overall global growth to be 3.5% this year (down 0.1 percentage points from its April estimate) and 3.9% in 2013 (down 0.2 percentage points).

The fund said that in the past three months, the global recovery had ‘shown signs of further weakness’.

‘Sovereign stress’ in the euro area had increased to ‘close to end-2011 levels’, and output in a number of major emerging market economies had also been lower than forecast.

Echoing comments made by IMF managing director Christine Lagarde earlier this month, it also warned that the projections could be downgraded further. ‘These forecasts… are predicated on two important assumptions: that there will be sufficient policy action to allow financial conditions in the euro area periphery to ease gradually and that recent policy easing in emerging market economies will gain traction,’ it said. ‘Clearly, downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action.

‘In Europe, the measures announced at the European Union leaders’ summit in June are steps in the right direction. The very recent, renewed deterioration of sovereign debt markets underscores that timely implementation of these measures, together with further progress on banking and fiscal union, must be a priority.’

The 2012 outlook for the combined economies of the eurozone is unchanged from three months ago, with an expected contraction of 0.3%. Growth in 2013 is set to be 0.7%, down from 0.9% predicted in April.

For the US, the IMF’s forecasts were downgraded to 2% for 2012 (compared to 2.1% in April’s forecast) and 2.3% in 2013 (compared to 2.4% in April’s forecast).

The US government was urged to avoid the ‘fiscal cliff’ – a package of spending cuts that will take effect in January 2013 if politicians fail to agree alternative spending policies. It should also ‘promptly’ raise the US debt ceiling and develop a medium-term fiscal plan.

The IMF added: ‘In emerging market economies, policymakers should be ready to cope with trade declines and the high volatility of capital flows.’