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IMF managing director Christine Lagarde.

KEITH BEDFORD/REUTERS

The International Monetary Fund is cutting its economic outlook, and policy makers should resist equating buoyant stock markets with a healthy global economy, the fund's managing director said Monday.

IMF managing director Christine Lagarde declined to provide the new forecast, which will be released early next month at the fund's annual meeting in Tokyo. In July, the IMF predicted the global economy would expand 3.5 per cent this year, a downgrade from an April estimate of 3.6 per cent.

"The global economy is still fraught with uncertainty, still far from where it needs to be," Ms. Lagarde said in prepared remarks for a lunchtime speech at the Peterson Institute for International Economics in Washington. "We continue to project a gradual recovery, but global growth will likely be a bit weaker than we had anticipated even in July."

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Much of Europe is in recession, the recovery in the United States is burdened by an unemployment rate of more than 8 per cent, and China is struggling to generate enough domestic demand to make up for deteriorating exports. Corporations are sitting on mountains of cash, paralyzed over the economy's weak prospects and uncertainty over how governments in Europe will solve their debt crisis and political deadlock in Washington.

The world's three leading central banks – the Federal Reserve, the European Central Bank and the Bank of Japan – have responded in recent weeks with some of their boldest policy measures to date. Stock markets have rallied, and interest rates on European sovereign debt have eased.

Ms. Lagarde praised the central bankers, saying the present batch could be remembered as heroes for pulling the global economy out of the Great Recession, unlike their ancestors in the 1930s, who worsened the Great Depression by raising interest rates too soon.

But Ms. Lagarde said it would be folly to declare victory, calling on politicians to take the baton from their central banks.

"We have seen positive market reactions before that turned out to be short-lived," she said. "This time we need a sustained rebound, not a bounce. If this time is to be different, we need certainty, not uncertainty. We need decision-makers to be real action-takers. We need delivery."

The biggest risk facing the global economy is Europe, Ms. Lagarde said, and leaders there must finally agree on a banking union to restore confidence in the financial system and individual governments must make structural changes to their economies that will boost growth.

Ms. Lagarde also put a spotlight on Washington, where lawmakers are toying with a recession by refusing to do anything to avoid a crush of tax increases and spending cuts in 2013. The IMF estimates the "fiscal cliff" could reduce growth by as much as 2 per cent.

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"We all recognize that political calendars impact the timing of key decisions," Ms. Lagarde said. "But the current uncertainty presents a serious threat for the United States and, as the world's largest economy, for the global economy."

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