IMF Issues Warning on US Economy

Last Updated: 4, July 2012

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The International Monetary Fund has pared its forecast for US economic growth this year, citing strains and risks from the eurozone debt crisis, as well as uncertainties over a “fiscal cliff” which could jeopardise the fragile economic recovery with negative spillovers to the rest of the world.

In a wrap up of its annual review of the U.S. economy, IMF managing director Christine Lagarde said during a press conference that while good progress has been made in reforming the US financial system, it “remains vulnerable to contagion from an intensification of the euro area debt crisis”.

Describing the recovery thus far as “tepid”, the IMF expects U.S. growth to remain modest during the next two years, constrained by housing difficulties, the expiration of fiscal stimulus measures and the persistent trend of weak global demand.

According to the report, growth is projected at 2 percent in 2012 about 2.2 percent in 2013.

In particular, the IMF urged warring U.S. politicians to break the deadlock over its fiscal path, warning that the threat of the “fiscal cliff” could have severe consequences for domestic and global growth.

The fiscal cliff refers to $4 trillion worth of expiring tax cuts and automatic government spending reductions, and most analysts expect Congress to strike a deal only after the congressional and presidential elections in November.

While the anticipation would buy time for lawmakers to work on a long-term budget and tax plan, the uncertainty policy outlook already appears to be weighing on business hiring and investment decisions.

The IMF said job creation has slowed since early 2010, while business investment “seems to have lost some momentum, despite the favourable financial conditions for the cash-rich corporate sector.”

In addition to the looming budget tightening, the IMF also noted that the United States in on-track to hit its $16.4 trillion statutory debt limit sometime late this year.

Without legislative action to raise this debt ceiling, the U.S. would default on some of its financial obligations, though the Treasury has said it could employ extraordinary cash management measures to postpone the default.

Warning of “global spillovers”, the IMF said:

[quote] As the world’s largest economy, the policy actions of the U.S. have significant effects on global growth and stability. Striking the right balance between fiscal consolidation and economic policy support would benefit the rest of the world, as it would avoid the risk of a spike in U.S. interest rates and an abrupt decline in U.S. growth in 2013. Further progress in implementing financial reforms would also be globally beneficial and reduce the scope for regulatory arbitrage. [/quote]

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