But don't expect the warning to spawn any real action.
"The global economy has entered a dangerous new phase," Olivier Blanchard, the IMF's chief economist said in the report released yesterday (Tuesday). "The recovery has weakened considerably. Strong policies are needed to improve the outlook and reduce the risks."
The IMF slashed its 2011 growth forecast for the U.S. economy from the 2.5% estimate it offered in June all the way down to 1.5%. Next year won't be any better: The 2.7% 2012 projection the IMF offered in June was cut all the way to 1.8%.
"Bold political commitment to put in place a medium-term debt reduction plan is imperative to avoid a sudden collapse in market confidence that could seriously disrupt global stability," the IMF said.
But with governments in Europe moving slowly to contain the sovereign debt crisis afflicting the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and the United States suffering from political gridlock, the IMF's call to action will likely go unheeded.
In recent weeks, U.S. President Barack Obama has proposed a jobs plan, as well as a deficit reduction plan. But with congressional Republicans opposed to elements of those plans - primarily increases in spending and taxes - the swift policy action the IMF sees as critical will likely be stillborn .
In Europe, the IMF is calling for bold action to contain the debt crisis. It is particularly worried that a Greek default could cause many large banks - which own much of the Greek debt - to take large losses.
That U.S. banks are intertwined with European banks heightens the risk.
According to Money Morning C apital W ave S trategist Shah Gilani, "U.S. banks are widely believed to have $41 billion of direct exposure to Greece" and have loaned heavily to their European counterparts.
More sobering, Gilani says, is that "U.S. money-market funds have a hefty European exposure, too." He noted that 12% of the loans made by our biggest money-market funds were made to three big European banks - two of which, Societe Generale SA (PINK ADR: SCGLY) and Credit Agricole SA, were downgraded by Moody's Corp. (NYSE: MCO) just last week.
The third, BNP Paribas SA, remains under review.
IMF Growth Forecast: Policymakers Are a "Step Behind"Standard & Poor's Inc. (NYSE: MHP) cut Italy's credit rating on Monday, adding to the IMF's worries over the direction of the E urozone debt situation.
"There is a wide perception that policymakers are one step behind themarkets," Blanchard said at a news conference. "Europe must get its act together."
The 2011 IMF growth forecast for Europe was reduced from the 2% estimate released in June to 0.6%; for next year, the IMF cut its estimate from 1.7% to 1.1%.
With the advanced economies lagging, the global IMF growth forecast for 2011 also was trimmed - to 4.0% from an earlier 4.3% - and it cut estimates for 2012 to 4.0% from an earlier 4.5% .
About the only bright spot in the IMF report is the emerging markets, which are generally enjoying strong, if slowing, growth. Collectively, the IMF growth forecast for emerging markets is 6.4% for this year and 6.1% for 2012.
Standouts here include China (9.5% growth in 2011 and 9% in 2012), India (7.8% and 7.5%), and sub-Saharan Africa (5.2% and 5.8%).
"After strong growth in recent years and on the horizon, most [emerging and developing economies] are in the enviable position of being able to invest in growth and employment and to brace against future global economic volatility," the IMF report said.
Unfortunately, if the advanced economies take a tumble, they'll drag down the emerging economies with them, the IMF said.
"Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing," the IMF said.
News and Related Story Links:
As Greek Debt Default Nears, Investors Need to Take Cover
The Only Way to Solve the European Sovereign Debt Crisis
Emerging-Market Stocks Hit Historic Lows: Don't Miss Your Chance to Load Up
The International Monetary Fund Web site:
World Economic Outlook report
IMF downgrades outlook for US and Europe economies
IMF Cuts Global Growth Estimate
The Wall Street Journal:
IMF Cuts Global Growth Forecast