IMF projects 'solid' US recovery in mid-2010

By AFP

July 15, 2010 Updated Jun 15, 2009 at 2:01 PM CDT

The International Monetary Fund on Monday said the US economy was poised for stronger growth than previously thought, with a "solid" recovery from recession in mid-2010, but cited risks, notably from the housing crisis and rising interest rates.

In its annual report on the world's biggest economy, the IMF projected gross domestic product (GDP) would shrink at an annualized rate of 2.5 percent in 2009, less sharply than the 2.8 percent contraction estimated in April.

Annual growth would return in 2010, at a weak 0.75 percent pace, compared with the prior estimate of flat activity.

"The staff's outlook remains for a gradual recovery," followed by a "solid recovery projected to emerge only in mid-2010," the multilateral institution said.

"The combination of financial strains and ongoing adjustments in the housing and labor markets is expected to restrain growth for some time," the report said.

The 185-nation institution underscored the "unusual level of uncertainty" in its latest projections.

Among the "significant downside risks," the IMF cited the real-estate crisis, marked by spiking foreclosures and falling home prices, as well as a slump in the commercial sector; rising interest rates that are pressuring both the government and businesses; and the global economic and financial crisis.

"Much will also depend on developments abroad, including progress made in strengthening financial institutions and markets," it said.

According to the latest US official GDP estimates, provided by the Federal Reserve on May 20, the economy will contract between 1.3-2.0 percent in 2009 and grow at a modest pace between 2.0-3.0 percent in 2010.

The US Treasury Department emphasized the IMF's evaluation represented "an independent judgement."

"Release of this statement is consistent with the United States' long-standing, strong support for enhanced transparency of the IMF," the Treasury said in a statement.

In its evaluation of US economic policies, the IMF repeated praise of the economic stimulus plan, saying that "macroeconomic policies are providing welcome support to demand."

The IMF also gave high marks to the government's support of the beleaguered financial sector. "Steps to stabilize financial and housing markets are having noticeable effects on financial conditions," it said.

"The immediate priority is to complete the strengthening of banks? capital positions, while continuing to guard against downside risks," it noted.

Nevertheless, the IMF cautioned, "once a sustainable recovery is underway," the government needs to "develop and communicate an exit strategy to withdraw monetary stimulus" in a broad and measured way to avoid market disruption.

The IMF also said it considered the dollar slightly overvalued, since it "is presently only modestly above the level implied by medium-term fundamentals."

But it noted "much will also depend on the evolution of foreign demand for US assets, underscoring the importance of fiscal and financial market reforms."

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