There's nearly a 20 per cent chance of the world falling back into recession, the International Monetary Fund has warned, with American politicians key to the financial fate of the world.
In a wake-up called from the fund, it used its latest World Economic Outlook report to argue the globe had suffered a new round of setbacks that had eaten into business and consumer confidence.
It downgraded its forecasts both for growth in rich nations and in the emerging world.
According to the fund there is now a one-in-six chance of world growth falling below 2 per cent, which is in line with a global recession.
Growth in China is now tipped to be lower than the fund's last forecasts in April with economic growth expected to average 7.8 per cent this year. It had originally been forecast to hit 8.2 per cent.
Next year growth has been cut to a forecast 8.2 per cent from an initial 8.8 per cent.
Australia will again out-perform the developed world, but it is also likely to face tougher conditions.
The fund upgraded its forecast for Australian economic growth this year, to 3.3 per cent from 3 per cent, but downgraded its 2013 forecast to 3 per cent. It had been expecting the Australian economy to grow by 3.3 per cent next year.
It also sharply cut inflation forecasts for Australia. It now expects consumer prices to climb by 2 per cent this year and 2.6 per cent in 2013, down on its 2.7 per cent and 3 per cent forecasts made in April.
Unemployment is forecast to average 5.2 per cent this year, lower than many private sector forecasts, and increase marginally to 5.3 per cent through next year.
But the fund's biggest concerns are about politicians and their decisions in Europe and the United States.
It said while there were positive signs in Europe that policy makers had woken up to the problems facing the continent, the situation in the US was not nearly as good.
If American politicians fail to come up with a plan to deal with the US budget deficit, the rest of the globe will suffer.
"US legislators must soon remove the threat of the fiscal cliff and raise the debt ceiling – if they fail to do so, the US economy could fall back into recession, with deleterious spillovers to the rest of the world," it warned.
The IMF said countries with the fiscal policy to move, such as Australia, could be required to ditch plans to slash spending over the coming year.
"Should growth fall significantly short of WEO projections, countries with room to manoeuvre should smooth their planned adjustment over 2013 and beyond," it found.