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Similar dangers loom over the eurozone and the United States, the IMF said, as it also made big cuts in its forecasts for other economies around the globe.

“The world economy is now entering a major downturn in the face of the most dangerous shock in financial markets since the 1930s,” it said in its twice-yearly World Economic Outlook this morning. “Although a recovery is projected to take hold in 2009, the pick-up is likely to be unusually gradual.”

As governments and central banks wage a desperate battle to douse what the IMF calls a global financial “firestorm”, today’s report said that “intensifying financial strains are beginning to take an increasingly heavy toll on economic activity across the developed world.

“Financial conditions continue to be under extraordinary stress,” the IMF said. “Looking ahead, conditions are likely to remain very difficult, restraining global growth prospects.”

Worldwide, the IMF cut its prediction for global growth next year from 3.9 to 3 per cent — not far above the 2.5 per cent level that it says defines global recession.

In the United States, today's report expects that a recession will take hold of the world's biggest economy in the present quarter and drag on into early next year. US growth is expected to be only 1.6 per cent this year and fall to a virtually stagnant 0.1 per cent in 2009 — down from the 0.8 per cent the fund forecast in the spring.

With 10 million American households in negative equity, with their homes worth less than their mortgage debt after an unprecedented house price slump, the IMF said that the US housing downturn was not likely to end until next year.

If financial turmoil persists and an even tighter credit crunch takes hold, the housing slump could last into 2010, deepening the American and world recession, the IMF cautioned.

The eurozone is also succumbing to a battering by huge financial strains, the report said. It is now forecast to grow by just 1.3 per cent this year and virtually stall next year, with growth of only 0.2 per cent. German growth is expected to grind to a halt in 2009, with the Italian and Spanish economies each suffering a 0.2 per cent drop in GDP.

The IMF backed the case for rate cuts from the Federal Reserve, European Central Bank and Bank of England that united to make a co-ordinated reduction in official rates on both side of the Atlantic.

With inflation set to drop from present highs — expected to top 5 per cent in Britain in September figures, out next week — the IMF said that this, alongside rapidly weakening growth and the squeeze from the credit crunch on both sides of the Channel, left ample scope for rate cuts in the UK and eurozone.

It said that, on both sides of the Atlantic, the pressing priority for governments and central banks was to restore calm in markets and halt the downward financial and economic spiral.

“The immediate challenge is to stabilise financial conditions, while nursing economies through a global downturn,” it said.

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