IMF trims U.S. economic outlook

NEW YORK (CNNMoney) -- The International Monetary Fund on Friday lowered its forecast for U.S. economic growth, and warned that risks to the global recovery have increased.

In the latest update to its World Economic Outlook, the IMF said it expects the U.S. economy to expand at an annual rate of 2.5% this year and 2.7% in 2012. That's down from projected growth rates in April of 2.8% and 2.9%.

The U.S. government said last month that the economy grew at an annual rate of 1.8% in the first quarter of 2011, down sharply from 3.1% in the final three months of 2010.

The slowdown in the first quarter was due partly to "transitory factors," the IMF said, including higher commodity prices, bad weather and supply chain disruptions due to the March earthquake and tsunami in Japan.

"We see this slowdown of the U.S. economy, which was quite visible in the first and second quarters, as more of a bump in the road than something more worrisome," said Olivier Blanchard, director of the IMF's research department, at a press conference in Sao Paulo, Brazil.

The global economy, meanwhile, is expected to slow temporarily in the second quarter, before regaining momentum later in the year, according to the IMF.

Recession risk: Small, but growing

Global economic activity is expected to expand at an annual rate of 4.3% this year, which would be down from 5.1% in 2010. In the first quarter of 2011, global activity rose at a 4.3% rate.

"The global recovery continues," said Blanchard. "But the road to health is a long one, and surely now is no time to relax."

The IMF said economic growth in emerging nations remains robust, albeit uneven. At the same time, advanced economies continue to struggle with the aftereffects of the global recession, according to the report.

China, the world's second largest economy, is expected to grow 9.6% this year, the IMF said. That's down slightly from 10.3% in 2010, but still the strongest of any emerging economy.

The IMF warned that some rapidly expanding economies in the developing world, particularly in Asia, are at risk of overheating. The fund said officials in these countries will need to take additional steps to tighten policy this year, including currency appreciation.

Japan's economy is expected to shrink this year as the disruptions caused by the March disaster have been worse than previously expected. But growth should resume in 2012, the IMF said.

While the fund acknowledged that inflation has risen more than expected this year, it also said volatile commodity prices have stabilized since May.

Consumer prices in advanced economies are expected to rise 2.6% this year, up sharply from 1.6% in 2010. By contrast, consumer prices in emerging economies are seen rising 6.9% this year.

The IMF warned that risks to the global economic recovery have increased.

Special report: Recovery At Risk

The report said "heightened potential for spillovers" from the fiscal challenges facing indebted nations on the periphery of Europe have grown since April. In addition, the IMF pointed to concerns in the financial markets about the slowing U.S. economy.

"If these risks materialize, they will reverberate across the rest of the world -- possibly seriously impairing funding conditions for banks and corporations in advanced economies and undercutting capital flows to emerging economies," the report reads.

Blanchard said troubled European countries such as Greece face "a long and painful process" to reduce public debts and get back on a path to sustainable economic growth over the long term.

While officials must act swiftly and aggressively to restore fiscal health, Blanchard said nations on the fringe of Europe will require outside help to avoid "disorderly" defaults and a possible debt "contagion."

"It's clear that these countries cannot get out of the hole alone," he said.

The IMF also called on policymakers in advanced economies to come up with "credible and well-paced" plans to bring down long-term deficits.

In the United States, the IMF said it is "critical" to immediately address the debt ceiling, which was exceeded earlier this year and has yet to be raised by Congress.