Mr Rudd warned yesterday the global downturn would get worse, and Australia's short-term outlook included rising unemployment and a difficult budget.

Mr Rudd, who will visit Washington this week, will travel to London early next month for the G20 talks on the world's economic situation.

Treasurer Wayne Swan will outline Australia's G20 proposals for dealing with "toxic assets" in a speech in Sydney tonight.

The speech is expected to encompass the Government's budget challenge.

Mr Rudd's bearish prediction follows a revision of International Monetary Fund forecasts.

The IMF said the world economy could contract by up to 1pc this year before bouncing back next year.

Mr Rudd said the revision directly affected Australia's economic growth, employment and budget revenue.

The Government is leaving open the option of another stimulus package if conditions deteriorate.

"We reserve the right to take what ever further action is necessary to continue to support the economy and jobs," Mr Rudd said.

National accounts figures showed the Australian economy went backwards in the December quarter.

Another negative quarter would meet the technical definition of recession.

"I think the global economic recession is getting worse before it gets better," Mr Rudd said.

"And it's clear that the impact of a worsening global economic recession will make it virtually impossible for Australia to sustain a positive economic growth for the period ahead with impacts of course for budget and employment, which underlines the importance of global action in response to the global recession."

Mr Rudd said the budget would be difficult because revenue was down and the Government would need to make further investments to cushion the impact of a recession.

He repeated undertakings the Government would use the May budget to deliver on pension reform for equity reasons, and because increasing pensions would put more money into the economy.

Mr Swan's task would be difficult, he said.

"Wayne Swan's hair will be getting greyer … as we prepare the budget over the next month or so," he said.