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The International Monetary Fund has slashed its global growth forecast for this year and exhorted the European Central Bank to boost liquidity to stave off a deeper eurozone crisis.
"The global recovery is threatened by the growing tensions in the euro area," the Fund said, according to a leaked draft of its World Economic Outlook which is due to be published next week.
Global GDP growth is to be cut from 4pc to 3.3pc, with drastic revisions for an arc of countries in Southern Europe.
Italy's economy will contract by 2.2pc and Spain's by 1.7pc as fiscal austerity measures bite harder and banks curtail lending, playing havoc with debt dynamics.
The eurozone as a whole will shrink by 0.5pc, down from growth of 1.1pc in the Fund's last forecast in September, an even grimmer outlook for the region than growth revisions released by the World Bank earlier this week.
The new figures are an admission that the IMF has been caught badly off guard by fast-moving events. It appears to misjudged the gravity of the crisis in Southern Europe. The new forecasts explain why the Fund is requesting a $600bn (£388bn) boost to its firepower.
Britain will muddle through with growth of 0.6pc, marginally below the 0.7pc forecast of the Office for Budget Responsibility. It will rebound to 2pc next year.
The US and China will remain the two main growth blocs in the world economy. The Fund predicts the US will grow at an unchanged rate of 1.8pc, and China will motor ahead at 8.2pc, down from 9pc.
"The most immediate political challenge is to re-establish confidence and put an end to the euro area crisis, supporting growth," said the draft, obtained by the Italian news agency ANSA. The text is subject to last-minute changes.
The IMF encouraged the ECB to continue moving to a "more accommodative monetary policy" to prevent a credit squeeze as European banks shrink their balance sheets to meet tougher capital ratios by June.
The UK may have already slipped back into recession, economic forecaster the Item Club has warned. The think tank said gross domestic product shrank in the final quarter of last year and would contract again in the current three-month period. It said that even if the eurozone could resolve its problems the UK economy would grow by just 0.2% this year. It also predicted unemployment would rise by a further 300,000 to just below three million people.
Chancellor George Osborne has warned that the UK economy faces "very difficult" times, ahead of the release of growth figures next week. The Office for Budget Responsibility (OBR) has predicted they will show GDP fell in the last three months of 2011. BBC economics editor Stephanie Flanders said the chancellor's comments would be seen as a "softening-up exercise"