The International Monetary Fund trimmed its forecasts for global output on Tuesday for the sixth time since early last year, saying stronger growth in most advanced economies would fail to make up for a more sluggish expansion in the developing world.
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Prospects for emerging markets, long the engine of the global recovery, have dimmed somewhat with both structural and cyclical factors at play, the IMF said in its latest snapshot on the health of the global economy.
The United States is driving much of the global recovery and U.S. output should pick up further next year - as long as politics do not get in the way, the IMF said, referring to a looming standoff over the nation's $16.7 trillion debt ceiling.
"A failure to promptly raise the debt ceiling, leading to a U.S. selective default, could seriously damage the global economy," the IMF warned in its latest World Economic Outlook, released ahead of its twice-yearly meetings later this week.
"Policymakers have shown their determination to keep the global economy away from the precipice. Aside from new cliff events, a growing worry is a prolonged period of sluggish global growth," the Fund added.
For 2013, the IMF now expects global output to expand just 2.9 percent, down from its July estimate of 3.1 percent, making it the slowest year of growth since 2009. It predicted a modest pickup next year to 3.6 percent, below its July estimate of 3.8 percent.
Emerging markets still account for much of global growth, and their economies should expand nearly four times as fast this year as advanced economies. But the heady expansions some enjoyed in recent years may be a thing of the past, the IMF said.
China in particular should slow over the medium term as its economy transitions away from investment to consumption drivers. Markets no longer expect the Chinese government to step in with stimulus if growth dips below 7.5 percent, the Fund said.
Lower growth in the world's second-largest economy could spill over to others, especially commodity exporters dependent on China's hunger for energy.
The IMF also highlighted the risk of tighter financial conditions as markets prepare for the end of ultra-loose U.S. monetary policy.
Olivier Blanchard, the IMF's chief economist, said it was time for the U.S. central bank to prepare for an exit from its massive bond-buying program, but he warned of the possibility of a difficult transition for financial markets.
"The communication problems facing the Federal Reserve are new and delicate," he wrote in a foreword. "It is reasonable to expect some volatility in long rates as Fed policy shifts."
In the United States, broad federal government spending cuts earlier this year should shave 2.5 percent from output in 2013, according to the Fund. But a recovery in real estate should contribute to economic growth of 2.6 percent next year, barring any more fiscal crises, it said.
The IMF said Japan had experienced an 'impressive' pickup since the government launched a massive stimulus program to spur the economy out of a prolonged stagnation, boosting output by about 1 percent. But growth should slow next year as the stimulus recedes and Japan moves ahead with higher consumption taxes, it added.
In Europe, a better mood more than any change in policy lifted core economies such as Germany and France, and even Italy and Spain should edge into positive growth territory next year, the Fund said.
But it added that the euro zone must still address financial fragmentation, improve the health of banks, and move closer to banking union, as the IMF urged in past reports.
Failure to address problems in Europe and the possibility of a surprisingly sharp tightening of financial conditions as the Fed withdraws from its massive bond-buying program may lead to medium-term global growth of only 3 percent, the IMF said.
That would be well short of the more than 4 percent growth it said it envisioned.
"Over time, worrisomely high public debt in all major advanced economies and persistent financial fragmentation in the euro area could then trigger new crises," it said.