IMF: U.S. Economy May be Weak for Years to Come

Government needs to step up with a debt-reduction plan and more stimulus funding, IMF says.

The International Monetary Fund on Tuesday warned that the U.S. economy could remain weak for years to come, describing a recovery stalled amid unrelenting headwinds and in dire need of a push from the government.

The Washington-based fund slashed its U.S. growth forecasts for this year and next, while warning of the need for more government stimulus in the short-term as well as a credible longer-term plan to cut spending.

"The U.S. economy is struggling to gain a strong foothold, with sluggish growth and a protracted job recovery," the IMF said, as it cut U.S. growth forecasts for this year by a full percentage point to a paltry 1.5%.

That is a slower rate than projected for the crisis-wracked eurozone.

Citing crushed U.S. consumer confidence and battered business sentiment -- as well as ongoing crises in the housing and financial markets -- the IMF said "growth will be modest relative to historical averages for years to come."

'Lost Decade' Ahead?

The bleak assessment is certain to fuel fears that the United States is destined for a Japan-like "lost decade" of growth, particularly as the White House and Congress continue to bicker over how to cut debt levels and how to stimulate growth.

"The first priority for the U.S. authorities is to commit to a credible fiscal-policy agenda that places public debt on a sustainable track over the medium-term, while supporting the near-term recovery," the IMF said.

As President Obama and his Republican foes fight over how to put the budget back on an even keel, the IMF said a solid deal is essential both for the U.S. and the global economy.

"Delays in accomplishing an adequate medium-term debt-reduction plan could suddenly induce an increase in the U.S. risk premium, with major global ramifications."

By contrast, a deal could pave the way for sounder short-term fiscal policies.

"This would allow the near-term fiscal policy stance to be more attuned to the cycle, for example, through temporary stimulus to support labor and housing markets, state and local governments, and infrastructure spending."

Confidence is Key

The IMF's gloomy assessment of the U.S. economy comes as Washington girds to enter a presidential-election year, making political compromise all the more tricky.

But the pessimistic outlook is shared by private economists.

"In an economy like that of the United States where around 60% of the economy is consumption, confidence is perhaps the most important ingredient requisite for economic growth and an improving job market," said Jason Schenker of Prestige Economics.

"Without confidence and without spending, deflation and recession are major risks."

Copyright Agence France-Presse, 2011


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