AUSTRALIA is more exposed to a slowing Chinese economy than any nation except its neighbour Mongolia, the International Monetary Fund has warned.
This comes as the IMF slashed its growth forecasts for Australia and China.
With world growth of only 2.9 per cent this year - the weakest since the 2009 crisis - the fund says there is a "plausible risk" of a long-lasting global stagnation.
The downbeat review of the global outlook, prepared for the IMF's annual meeting in Washington and publicly released today, contrasts with surging optimism among Australian businesses, with the National Australia Bank's latest survey showing confidence has soared to a three-year high.
Joe Hockey, who is in Washington for the meetings of both the IMF and the G20, said he would be meeting IMF managing director Christine Lagarde, US Federal Reserve chairman Ben Bernanke and other finance ministers.
"The trip will improve Australia's understanding of the range of risks facing the global economic recovery including the impact of the United States government budget shutdown and the US debt ceiling debate," he said.
The IMF has lowered its forecast for Australia's growth next year from the 3.3 per cent it expected in April to 2.8 per cent.
There is a similar markdown to its estimate for growth this year, from 3 per cent to 2.5 per cent.
It is one of the largest downward revisions in the growth outlook among advanced countries.
The fund's calendar year forecasts are not directly comparable with those of Treasury, however, they appear to be more pessimistic. In its pre-election budget review, Treasury left its 2014-15 growth forecast of 3 per cent unchanged while cutting its 2013-14 forecast to 2.5 per cent.
The IMF emphasised the slowdown in China and the other leading emerging economies that have sustained global growth over the past five years.
Although some pull-back was expected after the stimulus-induced growth surge in 2009 and 2010, the IMF says the extent of the downturn has taken its forecasters by surprise.
The fund now says that by 2016 the economies of China, India and Brazil will be 8-14 per cent smaller than it expected two years ago.
The fund has cut its estimate for China's growth next year from 7.7 to 7.3 per cent and says growth will remain "markedly lower" over the next five years.
It says there is a very close relationship between emerging country growth and commodity prices.
The IMF forecasts that metals prices will fall by between 4 and 5 per cent this year and next, while food prices will rise slightly this year but fall 6 per cent next year.
The IMF says Australia is more exposed to slower growth in China than any other commodity-exporting country except Mongolia, which shares a border with China.
Its modelling shows that the slowing in China's growth that has already been recorded would cut Australia's GDP by about 3 percentage points by 2025, as a result of reduced demand for iron ore and coal.
The IMF said the world economy still faced many risks, with the impasse over the US government's debt ceiling threatening to "seriously damage the global economy", while Europe could yet spark a new world financial crisis.
It said the most likely scenario was one of "continued, plausible disappointments everywhere".
This would include the failure of business investment to revive in the advanced world, Japan's growth revival petering out because of inadequate reform and China finding it harder to stimulate domestic consumption than expected.
Such conditions would see China's growth drop below 6 per cent, while growth in Japan and Europe would fall below 0.5 per cent.
Such a low-growth world would bring social instability in the emerging world and a threat to the solvency of the US and Japan.
The fund's central forecast is that world growth will pick up to a still subdued 3.6 per cent next year.
World trade volumes, which will only rise by 2.9 per cent this year, are expected to lift by 4.9 per cent next year.
Australian business is convinced brighter times lie ahead.
Business confidence Australia-wide soared to the highest level in 3 1/2 years last month on the back of the Coalition's election win.Any source
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