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Worst over for US but recovery to be slow: IMF

Last Updated: Saturday, August 1, 2009 - 23:09

Washington: The sharp contraction in the U.S. economy "seems to be ending" but recovery will be slow with risks still looming from the weak labor and housing markets, the International Monetary Fund said on Friday.

The IMF, in its annual report on the U.S. economy, stuck to earlier forecasts that gross domestic product will shrink by 2.6 percent in 2009 and then rise by 0.8 percent in 2010.

The report was prepared before U.S. data on Friday showed the economy contracted by a 1.0 percent annual rate in the second quarter.

"As a result of their increasingly strong and comprehensive policy measures, the sharp fall in economic output seems to be ending, and confidence in financial stability has strengthened," the IMF said in its report, which followed consultations with U.S. officials and institutions.

"Nevertheless, with financial strains still elevated, the recovery is likely to be gradual, and risks are tilted to the downside," it said.

The IMF said unwinding fiscal and monetary stimulus measures
would have to wait until a sustainable recovery is underway. But they need to develop exit strategies from stimulus programs, strengthen financial regulation and in the medium term cut budget deficits.

Charles Kramer, head of the IMF`s North American Division, said the United States may need more stimulus measures if economic and financial conditions worsen significantly.

Still, he said, policy-makers should be thinking about how to end the generous fiscal and monetary policy measures put in place over the last 10 months.

"We should emphasize that now is not the time to implement the exit, but it`s a good time to be developing and communicating exit strategies to underpin confidence," Kramer told reporters on a conference call.

The IMF`s North American division deputy, Marcello Estevao, said rising unemployment is the greatest threat to recovery efforts.

"The weakness in the labor market is going to reflect into the weakness in the housing market. When people lose jobs, wages don`t grow as much, it`s harder for people to pay their mortgage, Estevao said.

"There is substantial uncertainty exactly how this feedback would play out. And that is one of the reasons we have this very gradual recovery outlook for the U.S."

He said the IMF sees U.S. GDP growing "a little bit" in the second half, with a sustained recovery not starting until the second quarter of 2010.

The IMF`s forecast for unemployment was unchanged, seeing 2009 unemployment averaging 9.3 percent and rising to 10.1 percent for 2010.

Bureau Report

First Published: Saturday, August 1, 2009 - 23:09

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