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IMF reduces forecast for US, global growth

The International Monetary Fund said Friday that it expects the U.S. economy to grow at slower pace this year than previously estimated, dragged down by higher oil prices and lower factory output.

The lending organization also warned that the European debt crisis poses a growing threat to the global economy. It cited investors' increasing concerns that Greece's government won't be able to implement the changes necessary to avoid defaulting on its debt.

The U.S. is forecast to grow 2.5 percent this year, down from the IMF's April estimate of 2.8 percent. Growth will likely be 2.7 percent next year, the IMF said, rather than 2.9 percent. Both estimates are below the 2.9 percent growth the U.S. recorded in 2010. The global economy will likely grow 4.3 percent this year, down from an earlier estimate of 4.4 percent.

The lower U.S. forecast is similar to many recent downgrades by private economists. A survey this month of 38 economists by The Associated Press found that they expect growth of 2.6 percent this year, down from an earlier estimate of 2.9 percent.

By contrast, the IMF boosted its forecast for the 17-nation euro area, which it said it expects to grow 2 percent this year. That's compared to a previous forecast of 1.6 percent. The improved outlook is largely due to higher business investment spending in Germany and France.

Large budget deficits in the U.S. and Japan could threaten their economies, the IMF said.

Both countries should take steps to cut their deficits, but at a gradual pace, the IMF said. Rapid spending cuts or tax increases could threaten the two countries' "tepid recoveries."

"For the U.S., it is critical to immediately address the debt ceiling and launch a deficit reduction plan that includes entitlement reform and revenue-raising tax reform," the fund said.

The Obama administration and Republican lawmakers are negotiating over how to raise the nation's legal debt limit of $14.3 trillion, which the administration says it will reach Aug. 2. Republicans are insisting on about $2 trillion in cuts over 10 to 12 years before agreeing to raise the ceiling.

The Washington-based fund has 187 member nations and lends money to countries in financial distress. It has played a key role in negotiating and financing European Union bailout packages for Greece, Ireland and Portugal.