FedEx Corp. says the global economy is stalling, and it's going to get worse next year.

A decline in global trade is shrinking earnings at the world's second-largest package delivery company.

On Tuesday, FedEx said a continued slowdown in the developed world combined with high fuel prices will keep trade volumes at low levels.

FedEx sharply cut its earnings forecast for the fiscal year ending in May. It also warned net income in the current quarter will fall below analysts' already reduced expectations.

FedEx also said major changes to its Express unit — the one taking the brunt of the economic hit — will be announced next month.

FedEx further reduced its expectation for U.S. economic growth, although its predictions are mostly in line with economists.

Economic growth around the globe has slowed over the last several months.

U.S. industrial production last month fell by the largest amount in more than three years, as factories produced fewer cars, sofas and other goods. U.S. factory activity fell every month of FedEx's fiscal first quarter, while rising gas prices and high unemployment kept consumers from spending freely.

A steep decline in Asian exports due to weakness in Europe is causing most of FedEx's pain. But consumers and business around the globe are choosing to move goods by ground or ocean instead of by air to save money, which is hurting FedEx's core Express unit.

Rising fuel prices a factor

Fear of a further economic slowdown is driving some of that behavior, but FedEx says steadily increasing fuel prices are also playing a big role.

"The world economy has absorbed an incredible increase in the price of fuel," CEO Fred Smith said on a conference call.

"And that has had very big implications on the way people think about supply chains on their decisions to move by ocean or whether they move things by air."

FedEx hasn't been able to cut costs fast enough to match the decline in demand. It's reducing flights, taking planes out of service, and last month it offered buyouts to Express unit employees.

Operating income in that segment, which is about double the size of any other, fell 28 per cent in the first quarter. FedEx said a shift by a major cell phone maker to a slower shipping method accounted for half of that segment's shortfall.

Revenue rose one per cent as higher rates countered lower volume. FedEx said the broad cost cutting plan set to be announced for that unit next month won't include layoffs.

The Memphis, Tenn. company cut its forecast for the full to year to between $6.20 and $6.60 US per share, from $6.90 to $7.40 previously.

For the current quarter, FedEx forecasts earnings of $1.30 to $1.45 per share, compared with $1.57 per share last year. That's well under analysts' forecasts.

iPhone 5 will give boost

FedEx will get a boost from major technology product launches, like the recently announced iPhone 5, but not enough to make up for the slowdown elsewhere.

FedEx's forecasts are closely watched for signals of future economic health. Its results provide insight into the global economy because of the number of products it ships and the number of countries in which it does business.

Rival UPS also said last month it expects the global economy to get worse before it gets better.

In the three months that ended in August, FedEx Corp. earned $459 million, or $1.45 per share. That hit the top end of its recently lowered estimate.

Revenue rose three per cent to $10.79 billion. It earned $464 million, or $1.46 per share, on revenue of $10.52 billion in the same quarter a year ago. The company's ground unit performed better in the first quarter as it benefited from customers trading down.

Operating income in the company's ground segment rose nine per cent on an eight per cent increase in revenue.