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 Washington-based multilateral institution said.
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, in the worst downturn in decades, and grow at a modest pace between 2.0-3.0 percent in 2010.
At a news conference, John Lipsky, the IMF number two, criticized President Barack Obama's budget plan for fiscal year 2010, which begins in October, saying the projected reduction in the public debt ratio to GDP was based on "relatively optimistic" economic assumptions.
"Our estimate suggests that significant additional measures will be needed over time to ensure that these long-term targets are met," the IMF deputy managing director said.
Lipsky pointed out that US growth would depend in part on recovery from the global downturn. "The recovery is going to be broad-based, but it is going to be sluggish," he said, adding the IMF forecasts no return to trend growth in the advanced economies "until late next year."
The IMF noted that recent US economic indicators were signaling 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 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, 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.
The IMF 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."
The US Treasury said in a separate report that mainland China's Treasury bond holdings fell in April for the first time in 11 months.
China, which remains the biggest holder of US bonds, has recently voiced fear over the soaring US budget deficit.