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IMF: Global economic slowdown is getting worse, US must avoid 'fiscal cliff'

Updated at 8:30 a.m. ET The International Monetary Fund said the global economic slowdown is worsening as it cut its growth forecasts for the second time since April and warned U.S. and European policymakers that failure to fix their economic ills would prolong the slump. 

Global growth in advanced economies is too weak to bring down unemployment and what little momentum exists is coming primarily from central banks, the IMF said in its World Economic Outlook, released ahead of its twice-yearly meeting, which will be held in Tokyo later this week. 

"A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component," it said. "The answer depends on whether European and U.S. policymakers deal proactively with their major short-term economic challenges." 

Hannbial Hanschke / EPA

Greek Prime Minister Antonis Samaras receives German Chancellor Angela Merkel at the airport in Athens on Tuesday.

Meanwhile, German Chancellor Angela Merkel arrived in Greece on her first visit since Europe's debt crisis erupted here three years ago, braving protests to deliver a message of support -- but no new money -- to a country seen by many as a prime example of Europe's ongoing and entrenched economic woes.

Greece ramps up security ahead of Merkel visit

Thousands of Greeks defied a ban on protests, gathering in Syntagma square in central Athens as Merkel's plane touched down. Two protesters dressed in German military uniforms waved a red-black-and-white swastika flag and held out their arms in the Nazi salute.  

PhotoBlog: Merkel greeted warmly by PM, but not by Greeks

Many Greeks blame Merkel, who is holding talks with conservative Prime Minister Antonis Samaras, for forcing painful cuts on Greece in exchange for two EU-IMF bailout packages totaling over 200 billion euros. 

Fiscal cliff
Ahead of the IMF's Tokyo meeting, policymakers have flagged the U.S. "fiscal cliff" -- government spending cuts and tax raises due to take affect early in 2013 -- and resolving the euro area's debt crisis as the top issues facing the global economy. 

Europe's debt crisis is "a clear and present danger," Canadian Finance Minister Jim Flaherty said last week. 

In an interview with NBC's Andrea Mitchell, IMF chairwoman Christine Lagarde calls for urgent action from lawmakers to turn around the U.S. economy, saying that the combination of automatic tax hikes and spending cuts poses a major threat to the recovery.

The IMF forecast that global output in 2012 would grow just 3.3 percent, down from a July estimate of 3.5 percent. 

That would make this the slowest year of growth since 2009 when the world was struggling to pull out of the global financial crisis. It predicted only a modest pickup next year to 3.6 percent, below its July estimate of 3.9 percent. 

It projected U.S. growth would be a little more than 2 percent this year and next, but forecast a contraction in the euro area this year by 0.4 percent and modest growth in 2013 of 0.2 percent. 

Emerging markets are still expected to grow four times as fast as advanced economies, but the IMF took a sharp knife to its estimates for India and Brazil, with the latter now seen growing slower than the United States this year. 

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It also cut its expectations for China in 2012 and 2013 but warned against being overly pessimistic about the prospects of these economies, which were major engines of growth in the global financial crisis. 

"Let me be clear. We do not see these developments as signs of a hard landing in any of these countries," IMF Chief Economist Olivier Blanchard said at a briefing, referring to China, India and Brazil. 

More at work
The IMF said "familiar" forces were dragging down growth in advanced economies -- fiscal consolidation and a still-weak financial system, the same problems that have plagued the world since the global financial crisis exploded in 2008. 

"More seems to be at work, however, than these mechanical forces -- namely, a general feeling of uncertainty," Blanchard said in a commentary on the forecasts. 

CNBC's Steve Liesman breaks down the data on the IMF's forecast for global growth, including the downside risks from Europe's financial crisis and the U.S. "fiscal cliff."

Measures of risk and uncertainty remain at low levels, Blanchard pointed out, which makes it difficult to assess the nature of the uncertainty. 

"Worries about the ability of European policymakers to control the euro crisis and worries about the failure to date of U.S. policymakers to agree on a fiscal plan surely play an important role, but one that is hard to nail down," Blanchard said. 

The IMF said financial conditions are likely to remain "very fragile" over the near term because repairing euro zone problems will take time and there are concerns about how the U.S. economy will cope with the expected spending cuts and tax increases. 

Boehner 'not confident at all' fiscal cliff can be avoided

The "urgent policy priorities" for the United States should include avoiding the fiscal cliff, which the IMF said at the extreme would amount to a fiscal withdrawal of more than 4 percent of GDP in 2013, and economic growth would stall. 

"Both sides of the political aisle (should) signal that they are willing to compromise and that they're willing to get this done ... that could help lower the level of uncertainty that is affecting U.S. investors and consumers," IMF First Deputy Managing Director David Lipton told Reuters in an interview on Monday. 

Violent protests in Greece and Spain over tough austerity measures are striking fear in investors. Brian Kelly, JPMorgan Funds; Mark Travis, Intrepid Capital Funds; and CNBC's Michelle Caruso-Cabrera and Rick Santelli discuss.

Resolving the euro area crisis would require progress in adopting and implementing the various measures discussed, including banking and fiscal union, the IMF report said. 

"If the complex puzzle can be rapidly completed, one can reasonably hope that the worst might be behind us," Blanchard said. 
Euro zone finance ministers on Monday unveiled the European Stability Mechanism (ESM), a 500 billion euro rescue mechanism for lending to distressed economies in the 17-country bloc. 

Merkel Greece visit
Police have readied 6,000 officers, including anti-terrorist units and rooftop snipers, to provide security during Merkel's six-hour visit. German sites in the Greek capital, including the embassy and Goethe Institute, are under special protection. 

Merkel was given the red carpet treatment and full military honors at Athens airport. Samaras greeted her with a handshake as she exited the German air force jet. A band played the German and Greek national anthems. 

In the center of Athens, the reception was less warm. On Syntagma square, banners read "Merkel out, Greece is not your colony" and "This is not a European Union, it's slavery."

Merkel tries to calm uproar over eurozone plans

"We don't want her here. Merkel go home!," said Maria Dimitriou, a 40-year-old unemployed woman who travelled to Athens from southern Greece to protest. "They've turned our lives into hell." 

Many of Europe's leading politicians have avoided official travel to Greece and the risk of a hostile reception, as the debt-saddled country struggled to keep up with commitments needed to guarantee rescue loan payments and long-term euro membership. 

Greece's respected Kathimerini daily said Tuesday that "no foreign leader should be afraid to come here." 

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"Extreme behavior, violence, and exaggerated comments by politicians on TV can achieve nothing to help the unemployed or pensioners and just place the country in a position where it looks bad whatever it does," an editorial said. "Today's visit is crucial and historic. Let us all treat it accordingly." 

Reuters and The Associated Press contributed to this report

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