IMF projects 'solid' US recovery in mid-2010 but big risks

By AFP

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

The International Monetary Fund projected Monday the United States would make a "solid" recovery from recession in mid-2010, but warned of major risks including the real-estate crisis and rising interest rates.

In its annual report on the world's biggest economy, the IMF projected US gross domestic product (GDP) would shrink at an annualized rate of 2.5 percent in 2009 and post modest 0.75 percent growth in 2010.

The outlook was better than the IMF April forecasts of a 2.8 percent contraction this year followed by flat growth in 2010.

"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.

"Recent data suggest that the sharp fall in output may now be ending, although economic activity remains weak," the IMF said.

The IMF noted that recent economic indicators were pointing to a slowing pace of deterioration, especially in the labor and housing markets which are key to economic recovery and stability.

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

Economic slack would increase, pushing up unemployment to a peak "close to 10 percent" in 2010 and driving core inflation -- consumer prices minus food and energy -- to "very low levels," it said.

The overall consumer price index was expected to fall by a half percentage point in 2009 and rise by 1.0 percent in 2010.

The US economy, which entered recession in December 2007, is struggling with the worst downturn in decades. GDP -- a broad measure of goods and services output -- shrank by 5.7 percent in the first quarter after a brutal 6.3 percent contraction in the 2008 fourth quarter.

The IMF estimates were less rosy than the latest US official figures. The Federal Reserve on May 20 estimated the economy would 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, responding to the IMF report, emphasized the IMF's evaluation represented "an independent judgement."

The IMF said there was "unusual level of uncertainty" in its latest projections.

Among the "significant downside risks," the 185-nation institution 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.

The IMF report followed a meeting over the weekend of Group of Eight (G8) finance chiefs which underlined the uncertain path back to economic and financial stability.

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.

Nevertheless, the IMF cautioned, "once a sustainable recovery is underway," the government needs to engage in an exit strategy to withdraw its increased massive role in the economy in a way to avoid market disruption.

At the G8 meeting, US Treasury Secretary Timothy Geithner said that since there was no recovery in place "it's too early to shift towards policy restraint."

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."

In a separate report, the US Treasury said that mainland China's Treasury bond holdings fell in April for the first time in 11 months. China, however, remains by far the biggest holder of US bonds, despite years of trying to diversify its reserves away from the US dollar.

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