WASHINGTON (AP) — The International Monetary Fund has sharply downgraded its outlook for the U.S. economy through 2012 because of weak growth and concern that Europe won't be able to solve its debt crisis.
The international lending organization expects the U.S. economy to grow just 1.5 percent this year and 1.8 percent in 2012. That's down from its June forecast of 2.5 percent in 2011 and 2.7 percent next year.
The IMF has also lowered its outlook for the 17 countries that use the euro. It predicts 1.6 percent growth this year and 1.1 percent next year, down from its June projections of 2 percent and 1.7 percent, respectively.
The gloomier forecast for Europe is based on worries that Greece will default on its debt and destabilize the region.
"Fear of the unknown is high," said Olivier Blanchard, the IMF's chief economist. "Strong policies are urgently needed to improve the outlook and reduce the risks."
Overall, the IMF predicts global growth of 4 percent for both years. Stronger growth in China, India, Brazil and other developing countries should offset weaker output in the United States and Europe.
The U.S. economy grew at an annual rate of just 0.7 percent in the first six months of the year. And the U.S. unemployment rate has stayed above 9 percent for all but two months since the recession officially ended two years ago.
Financial turmoil and slow growth are feeding on each other in both the United States and Europe, IMF officials say. Europe's debt crisis is causing banks to reduce lending and hold onto cash. Sharp stock market drops in the United States over the summer have hurt consumer and business confidence and will likely reduce spending. That slows growth, which leads many investors to shift money out of stocks and into safer investments, such as Treasury bonds. In Europe, slower growth will make it harder for stressed nations to get their debt under control.
U.S. and European policymakers need to act more decisively to cut budget deficits, the IMF said. And European officials need to ensure that the region's banks have enough capital to withstand the debt crisis.
The IMF said in its report that the U.S. economy faces longer-lasting problems that go beyond high gas prices and disruptions caused by the Japan crisis.
Employers are adding few jobs and giving out meager pay raises. Many homeowners owe more on their mortgages than their homes are worth. Banks are keeping credit tight.
All those trends are holding back consumer spending. Unemployment is likely to average 9 percent next year, the IMF's report said, echoing a recent estimate by the Obama administration.
President Barack Obama's proposal to cut taxes and spend more on infrastructure should provide much-needed short-term stimulus, the IMF said. But it needs to be paired with a longer-term plan to reduce the deficit over, the report said. The timing of the budget cuts is key, Blanchard said.
Budget cuts "cannot be too fast or it will kill growth," Blanchard said in a statement. "It cannot be too slow or it will kill credibility."
The 187-member nation fund conducts economic analysis and lends money to countries in financial distress. It will hold its annual meetings with the World Bank later this week in Washington.