Uncertainty weighs heavily on outlook: IMF

The International Monetary Fund (IMF) has made across-the-board cuts to its world economic growth forecasts, saying "uncertainty weighs heavily on the outlook".

Releasing its latest World Economic Outlook (WEO) in Tokyo on Tuesday, the IMF said output was expected to remain sluggish in advanced economies but still solid in many emerging market and developing economies.

"Those forces pulling growth down in advanced economies are fiscal consolidation and a still weak financial system," IMF chief economist Olivier Blanchard says in the report.

"Growth is now too low to make a substantial dent in unemployment."

The IMF cut its forecast for world output to 3.3 per cent for 2012 from its 3.5 per cent expectation it made in its July update, and to 3.6 per cent for 2013 from 3.9 per cent previously.

"The recovery has suffered new setbacks," the report says.

"A key reason is that policies in the major advanced economies have not rebuilt confidence in medium-term prospects."

The IMF's latest forecasts rest on two "crucial" policy assumptions - that European policy-makers adopt policies that ease financial conditions further in periphery economies, and that the US prevents automatic tax increases and spending cutbacks, the so-called "fiscal cliff", that currently exist in budget law.

But the IMF is warning that the WEO forecast "could once again be disappointed on both accounts".

It says slowing growth in China has affected activity in the rest of Asia because of the deepening linkages throughout the region in the past decade.

However, activity was boosted by recovery from natural disasters and reconstruction in Japan and Thailand, as well as in Australia and New Zealand.

"In Australia, continued strong mining activity and related investment have also supported growth," the IMF said.

It has upgraded its growth forecast for Australia to 3.3 per cent for 2012 from a three per cent prediction made in April - it is not included in the July update - but the IMF has downgraded the outlook to three per cent for 2013 from 3.5 per cent previously.

Australian inflation is expected to be contained within the Reserve Bank of Australia's two to three per cent target band - two per cent in 2012 and 2.6 per cent in 2013.

Unemployment is expected to remain relatively low at 5.2 per cent this year and 5.3 per cent in the next year.