US economy to remain slow for next two years, forecasts IMF

Friday, August 03, 2012
[PHOTO: UNifeed] 
Washington: The International Monetary Fund said the United States (US) economy continued its tepid recovery. 

In its latest assessment of the world's largest economy, the IMF said risks have intensified from the worsening of the euro area crisis and the uncertainty over domestic fiscal plans.

"The reality is that we think that the economy will remain slow for the rest of this year and for 2013.  The main reason why this is the case is that the U.S. consumer will need to continue to save in order to rebuild wealth that they have lost with the crisis, in particular because of the sharp fall of house prices.  And consumers from abroad won't be much help either because growth prospects abroad don't look particularly exciting as well," said Roberto Cardarelli, the head of the IMF's North America Division.

The IMF said there were also risks from a further deterioration of the European debt crisis, which would lower demands for U.S. exports and hurt financial markets.

Cardarelli said the weak labor market is a reflection of the still-weak recovery. A faster pace of economic recovery than experienced so far will not only allow the current pool of unemployed and underemployed individuals find jobs, but will also re-attract into the labor force a large number of those who have stopped looking for an occupation since the onset of the crisis, he said.

At the same time, policies that help the long-term unemployed find jobs, such as training and job search assistance, would help reduce the risk that unemployment would remain higher than pre-crisis rates even as the economy recovers, according to the IMF.

"Well, the loss of jobs has been one of the most striking features of this recession.  About 7-1/2 million jobs have been lost since the start of the recession and only a fraction of them, about 3 million, have been recovered.  And, of course, many more jobs will need to be added just to keep up with the population growth.  When this is going to happen, we believe it's not going to happen very soon because the U.S. economy is going to continue recovering only slowly from the recession.  But we're confident that from 2013 on, with the economy accelerating, there's going to be more jobs created in the U.S.," Cardarelli said.

Cardarelli said another key risk to the recovery was the upcoming budget cuts and tax hikes, known as the 'fiscal cliff.' He said if the fiscal cliff materialized, the economic effects would be severe, as the U.S. economy would contract in early 2013 and negative spillovers would be felt around the world. Some unfavorable effects from the fiscal cliff could be felt later this year, as consumer and business spending may be held back by the uncertainty about tax rates and government spending levels.

The IMF recommends policymakers reach agreement on a plan before the end of 2012 to reduce the debt to more sustainable levels through a gradual reduction of the deficit. In addition, the IMF says the federal debt ceiling should be raised well ahead of the deadline, to alleviate the risks of financial market disruptions and a loss in consumer and business confidence.

"There are a couple of critical deadlines that are approaching which test Congress' ability to find a common ground.  One is Congress will need to authorize the government to increase the amount of debt that it can raise early in 2013.  And early in 2013, a series of tax breaks are going to expire and some across-the-board spending cuts are going to kick in, the so-called fiscal cliff.  If Congress is not going to act to prevent that from happening, the recovery is going to be threatened at a time where it needs a lot of support still," Cardarelli said. 

- UNifeed/IMF
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