U.S. Faces Weak Recovery Says IMF

The IMF estimated the lackluster recovery would only trim 0.1 point off unemployment in 2011 compared with 2010.

The International Monetary Fund warned on Oct. 6 that the United States was staring at a sluggish recovery from severe recession in the face of weak consumer spending and high debt. Growth in the world's largest economy slowed to 1.7% in the three months to June from a 3.7% pace in the first quarter, and key indicators suggest "a weak recovery in coming quarters," the IMF said in its latest economic forecasts.

After contracting 2.6% last year amid the global recession, the U.S. economy is poised for growth of 2.6% in 2010 that slows to 2.3% in 2011, the Washington-based agency said.

The IMF projections, published in its latest World Economic Outlook, slashed 0.7 point and 0.6 point off the 2010 and 2011 forecasts, respectively, marking the two sharpest downgrades of any economy since the July WEO update. "Much of the weakness of this recovery is due to sluggish personal consumption -- by far the biggest component of U.S. GDP," the 187-nation financial institution said.

Consumer spending, which normally accounts for about 70% of U.S. gross domestic product, remains battered.

The IMF listed a litany of woes keeping wallets closed, from shrinking investment portfolios to the collapse of a housing bubble three years ago.

High unemployment, currently at 9.6%, and tight bank lending also leaves consumers reluctant to spend.

The IMF estimated the lackluster recovery would only trim 0.1 point off unemployment in 2011 compared with 2010.

In that context, inflation was expected to remain low -- 1.4% in 2010 and 1% in 2011 -- and there is "a tail risk" of deflation, it said.

A glimmer of growth was in private investment in software and equipment which has rebounded strongly. "In the near term, fixed investment is likely to be the principal driver of domestic demand as inventory accumulation slows," the IMF said.

But the IMF warned that "risks to the outlook remain elevated and are tilted to the downside."

A key challenge is government debt, which was projected to rise to about 110% of GDP by 2015 under current policies.

"Given the risks posed by budgetary imbalances, the groundwork for fiscal consolidation must begin in 2011," the IMF urged.

A proposed fiscal tightening of about 1% in 2011 by President Barack Obama's administration "strikes the right balance between near-term support for the recovery and medium-term credibility."

The Federal Reserve's recent decision to resume its purchases of government securities was "appropriate" given the larger downside risks. "Because of the U.S. dollars role as a reserve currency and the importance of the United States as a financial center, policy inaction by the U.S. authorities would have far greater effects on other economies than that implied by trade linkages alone," the IMF warned.

Copyright Agence France-Presse, 2010

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