A clothes shop in Rome advertises winter sales earlier this month. The spreading effects of a European slowdown will drag on Canada's growth, the IMF says. (Gabriel Bouys/AFP/Getty)

The International Monetary Fund Tuesday lowered its forecast for Canadian economic growth this year, predicting it will be dragged down by a cascading crisis in Europe and weakening conditions elsewhere.

In its latest economic outlook, the Washington-based monitor of global financial affairs predicted the Canadian economy will likely now grow by only 1.7 per cent — three notches lower than the Bank of Canada's estimate just last week — and two-tenths of a point lower than its own previous call in September.

And the IMF doesn't see much improvement in 2013, forecasting two per cent growth, again lower than the central bank’s prediction of 2.8 per cent.

The IMF also predicted global growth of 3.25 per cent, slower than the four per cent pace it projected in September.

Europe's recession should have only a modest impact on the United States, it said, forecasting 1.8 per cent growth for this year, unchanged from its September estimate.

It predicted that the economies of Italy and Spain will contract in 2012, and the eurozone as a whole will suffer a mild recession with a 0.5 per cent contraction of economic activity.

In September, the IMF had predicted 1.1 per cent growth for the region. China, it expected, will grow by 8.2 per cent this year, down from the fund's earlier projection of nine per cent.

"The updated ... projections see global activity decelerating but not collapsing," It said.

"Most advanced economies avoid falling back into a recession, while activity in emerging and developing economies slows from a high pace."

However, the IMF warned that the dangers to the global economy have intensified since its last review of conditions, particularly in Europe. If Europe unravels, the global outlook is subject to considerable downward revisions, it said.

'Moreover, concerns about geopolitical oil supply risks are increasing.'—International Monetary Fund

If markets were to push up borrowing costs for vulnerable countries in Europe, the ripple effects could easily result in global economic growth slowing two percentage points more than currently assumed, the IMF warns.

The IMF report sees other obstacles to recovery, beyond Europe’s crisis.

It said debt and debt consolidation plans in United Sates and Japan also have the potential of triggering "turmoil in global bond and currency markets."

"Moreover, concerns about geopolitical oil supply risks are increasing," it added.

"The oil market impact of intensified concerns about an Iran-related oil supply shock (or an actual disruption) would be large, given limited inventory and spare capacity buffers, as well as the still-tight physical market conditions expected throughout 2012."

The outlook came ahead of meetings of world leaders at the World Economic Forum in Davos, Switzerland later this week, where leaders are expected to focus on the containment strategies for Europe's debt crisis.

With files from The Canadian Press and The Associated Press