Australia is in for a tough economic year after the World Bank slashed its global growth forecasts and warned there could be a worldwide recession worse than three years ago.
In its latest Global Economic Prospects report, the World Bank downgraded its forecasts for 2012 and 2013 by almost half due to a deterioration in the world economy over the past six months.
The Washington-based institution now forecasts global growth at 2.5 per cent in 2012 and 3.1 per cent in 2013, down from its June 2011 forecast of 3.6 per cent for both years.
"The world has entered a very difficult phase characterised by significant downside risks and fragility," the bank said.
The report warned capital markets could freeze up, leading to a crisis similar in size to that caused by the collapse of US investment bank Lehman Brothers in September 2008, which marked the start of the global financial crisis.
"The world could be thrown into a recession as large or even larger than that of 2008-09," it said.
While there were few direct references to Australia in the report, Acting Treasurer Bill Shorten said it backed up the Labor government's previous warning that the world economy was in a dangerous phase.
"There's no doubt we've got a tough year ahead of us," Mr Shorten said on Wednesday in a statement.
"There are huge challenges in the global economy and these will inevitably impact on our economy and our budget."
The government's mid-year budget review released in December showed a further $20 billion had ripped from overall revenue since May 2011 due to the aftershocks of the 2008-2009 global crisis.
But Mr Shorten said the fundamentals of the Australian economy remained strong despite the threats.
"We've got solid growth, contained inflation, low unemployment and very low debt," he said.
The World Bank projected the United States, the world's largest economy, would grow by 2.2 per cent this year as it slowly recovered from its recession.
China, Australia's largest trading partner, would remain the world's growth engine, although at a slower pace of 8.4 per cent this year, compared with an estimated 9.1 per cent jump in 2011.
The World Bank said the financial turmoil caused by the escalation of the sovereign debt crisis in Europe was spreading to both developing and high-income nations and was generating "significant headwinds".
It said capital investment to developing nations had fallen by nearly half compared with a year ago.
Europe appeared to be in recession and growth in several major developing nations (Brazil, India, Russia, South Africa and Turkey) had slowed, partly as a result of a tightening in domestic policy.
