While the global economy is still on track to match last year's pace, which was the strongest since 2011, the new outlook suggests fatigue is setting in and the overall performance masked divergence with mounting weakness in emerging markets from Brazil to Turkey.
Thor Equities CEO Joe Sitt on the increasing USA trade tensions with China.
"There are clouds on the horizon".
"US growth will decline once parts of its fiscal stimulus go into reverse", Mr Obstfeld said in a statement.
But the outgoing chief economist - who retires from the Fund later this year - added that it was a "mixed picture" with some Latin American and African nations getting growth forecast upgrades.
On monetary policy, the IMF said it should be tightened to anchor expectations where inflation is expected to pick up, say in India. Britain's FTSE 100 dropped 0.4 per cent to 7,201.
The IMF's cut to its outlook was broad-based.
The IMF now expects South Africa's economy to expand 0.8 percent, down from a forecast of 1.5 percent in July.
However, in a newspaper article, the country's former ambassador to the World Trade Organisation Manzoor Ahmad said China only accounted for 10 per cent or so of Pakistan's loan repayments.
Beijing has answered with taxes on $110 billion worth of US exports.
"IMF's downgrade just goes to show how the tariff dispute between USA and China is beginning to take its toll on the global economy", said Peter Cardillo, chief market economist at Spartan Capital Securities in NY.
In this worst case scenario, the U.S. economy would take a significant hit, while economic growth in China would drop below 5% in 2019, compared with a current prediction of 6.2%.
The growth rate of United States for 2018 is 2.9 per cent and that of 2019 has been powered to 2.5 per cent.
This is down from its July forecast of 3.9 percent growth for both years.
Several emerging markets had their forecasts cut, including Argentina, Brazil, Iran and Turkey, reflecting factors including tighter credit.
"Near-term risks to global financial stability have increased somewhat", the International Monetary Fund said. Core inflation, which excludes volatile items such as energy, will vary from country to country, it said.
In the United States, momentum is still strong as fiscal stimulus continues to increase, but the forecast for 2019 has been revised down due to recently announced trade measures, including the tariffs imposed on $200 billion of U.S. imports from China.
Wednesday warned that global growth may be significantly harmed with further escalation of trade tension, which is a result of the uneven global economic recovery that has fuelled inward-looking policies and contributed to increased policy uncertainty.