IMF Sees U.S. Economy Contracting 0.7% in 2009

IMF says activity is increasingly being held back by slumping confidence.

The IMF on Nov. 6 sharply cut its outlook for the U.S. economy, predicting a contraction of 0.7% in 2009 amid a brutal slowdown in global activity. The new forecast from the International Monetary Fund comes less than a month after its semiannual World Economic Outlook, which has now been cut heavily in the face of financial market turmoil and other woes.

On October 8, the IMF had predicted the U.S. economy would growth 0.1% in 2009, but it now sees far more difficult conditions worldwide including the first contraction in advanced economies since World War II as a result of a global credit crunch that has hit banks and financial markets. "Markets have entered a vicious cycle of asset deleveraging, price declines, and investor redemptions," the IMF said.

"Beyond the direct impact of the financial crisis, activity is increasingly being held back by slumping confidence. As the financial crisis has become more entrenched, households and firms are increasingly anticipating a prolonged period of poor prospects for jobs and profits. As a result, they are cutting back on consumption, notably of durables, and investment."

The IMF said the U.S. economy will still show positive growth for 2008, but at a tepid rate of 1.4%, with the second-half contraction offsetting growth in the first six months of the year.

Official US data, which may still be revised, showed U.S. gross domestic product fell at a 0.3% annual pace in the third quarter amid a sharp retrenchment by consumers and businesses. The decrease marked a sharp fall from the 2.8% growth rate of the second quarter.

The IMF said world growth is projected to slow from 5% in 2007 to 3.7% in 2008 and to just 2.2% in 2009, with the downturn led by advanced economies.

Copyright Agence France-Presse, 2008

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