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US faces weak recovery from Great Recession: IMF

October 06, 2010

The International Monetary Fund warned Wednesday 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 percent in the three months to June from a 3.7 percent 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 percent last year amid the global recession, the US economy is poised for growth of 2.6 percent in 2010 that slows to 2.3 percent 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.

"The most likely prospect for the US economy is for a continued but slow recovery, with growth far weaker than in previous recoveries, considering the depth of the recession," the agency said.

"Much of the weakness of this recovery is due to sluggish personal consumption -- by far the biggest component of US GDP," the 187-nation financial institution said.

Consumer spending, which normally accounts for about 70 percent of US gross domestic product, remains battered. The worst recession in decades began in December 2007 and ended in June 2009, according to US data.

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 percent, 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 percent in 2010 and 1.0 percent 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."

US authorities will need to find a way to exit from extraordinary intervention to support the recovery without undermining it, while dealing with the long-term legacies of fiscal imbalances, inadequate financial regulation, and a weakened banking sector.

A key challenge is government debt, which was projected to rise to about 110 percent 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 1.0 percent 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 US dollar's role as a reserve currency and the importance of the United States as a financial center, policy inaction by the US authorities would have far greater effects on other economies than that implied by trade linkages alone," the IMF warned.

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