IMF says US economy on the mend, slowly


Posted at Jun 21 2008 01:44 AM | Updated as of Jun 21 2008 09:44 AM

Agence France-Presse

WASHINGTON - The slowdown in the US economy is not as bad as previously estimated, the International Monetary Fund said Friday, lifting its growth estimates slightly for 2008 and 2009.

The IMF forecast annual growth of 1.1 percent in 2008 and 0.8 percent in 2009, compared with a prior estimate of 0.5 percent and 0.6 percent, respectively.

Despite housing and credit crises, "the US economy has held up well," John Lipsky, the IMF's first deputy managing director, said at a news conference, predicting it would "avoid a hard landing."

In its annual review of the world's largest economy, the IMF said the US economic slowdown "has been less than feared, and recovery should begin next year as important headwinds are overcome."

The 185-nation institution, tasked with promoting financial stability, did not mention recession in its review, after predicting a mild recession for this year only in April, and called on the Federal Reserve to maintain interest rates unchanged.

"Monetary policy settings are now broadly supportive of recovery, and a risk-management approach would suggest that policy should be on hold," it said.

That recommendation was based on expectations inflation will be contained, despite soaring commodity prices, in particular crude oil.

The IMF predicted US inflation at 2.5 percent this year, slowing to 2.0 percent in 2009.

However, a robust hike in interest rates would be warranted at the first signs of a recovery, Lipsky told reporters.

"We do see the case for a vigorous response once the economy recovers," he said.

Still, any monetary policy tightening by the Fed should not be undertaken more quickly than the market expects -- at this point in the autumn -- in order to avoid accelerating job losses, he said.

The IMF warned however that "the unusual nature of the ongoing crisis in the financial and housing sectors leaves the outlook highly uncertain."

The economy is facing "historically unprecedented shocks ... and there is the worrisome possibility that weakening activity will feed back into further bank losses, generating a longer slowdown."

In terms of economic policy, the IMF, whose biggest stakeholder is the United States, praised the federal government for its "quick and decisive" response, particularly on its fiscal stimulus to boost economic growth, but counseled against a second stimulus plan due to pressures on the budget that "limit the room for further discretionary fiscal expansion."

To prevent the troubled housing prices from falling "below equilibrium," the IMF recommended the government take new steps to limit the number of "avoidable" foreclosures.

"Although policies need to be mindful of moral hazard and it is clear that house prices still need to adjust down, overshooting is a clear risk with important macroeconomic consequences," it said.

Lipsky acknowledged that the situation on the financial markets was "still far from normal," despite the recapitalizations undertaken by financial institutions and the Fed's massive cash injections into the tight credit market.

He called for reform in the financial sector, but added: "We should have all the regulation we need but not more."