Its latest World Economic Outlook also predicts Australian growth will almost halve over the next two years.

The IMF has cut its forecast for world growth for 2008 to 3.9 per cent, a 0.2 per cent decline from its prediction in July.

For 2009 it expects 3.0 per cent growth, a hefty 0.9 per cent drop from its previous forecast.
That compares with 5.0 per cent growth in 2007.

"Financial conditions are likely to remain very difficult, restraining global growth prospects," the IMF said.

"Additional credit losses are very likely as the global economy decelerates ... financial institutions` ability to raise new capital will remain very challenged."

It said its baseline projections assume that actions by the US and European authorities will succeed in stabilising financial conditions and avoid further "systemic events".

"Nonetheless, even with successful implementation of the US plan to remove troubled assets from bank balance sheets, counterparty risk is likely to remain at exceptionality high levels for some time, slowing down the return to more liquid conditions in key financial markets," it said.

However, it sees several factors that are expected to lay the groundwork for a gradual recovery from late 2009.

It expects commodity prices will stabilise at around 20-year highs, and that the US housing sector will finally reach a bottom in the coming year, ending the intense drag on growth since 2006.

It also expects emerging economies will provide a source of resilience, benefiting from strong productivity growth and improved policy frameworks.

"Of course, the longer the financial crisis lasts, the more they are likely to be affected," it said.

The two paragraphs in the report set aside for the Australian and New Zealand economies in the 88-page document are a little dated, particularly in Australia`s case given yesterday`s surprise 100 basis point interest rate cut by the Reserve Bank of Australia.

It also makes no mention of New Zealand being in recession.

Still, it said both economies were slowing noticeably after prolonged economic expansions driven by commodity and housing booms.

"In both countries, sound fiscal positions provide scope for allowing automatic stabilisers to operate in full and for judicious use of discretionary stimulus if the outlook deteriorates further," it said.

It is forecasting the Australian economy to grow 2.5 per cent in 2008 and 2.2 per cent in 2009 after 4.2 per cent growth in 2007.

It expects the unemployment rate will be 4.3 per cent this year, rising to 4.8 per cent in 2009.