WASHINGTON - The slowdown in the US economy is not as bad as previously estimated and recession likely will be avoided, the International Monetary Fund said Friday, lifting growth estimates 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 in April of 0.5 percent and 0.6 percent, respectively.
The unexpectedly strong recovery trend was illustrated by year-over-year fourth-quarter growth estimates. The IMF forecast flat growth in this year's final quarter, compared with a negative 0.7 percent seen in April, and 2009 fourth-quarter growth of 1.9 percent, up from a prior 1.6 percent.
"The slowdown in activity in the United States has been less than feared, and recovery should begin next year as important headwinds are overcome," the IMF said in its annual review of the world's largest economy.
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.
However, a robust hike in interest rates would be warranted at the first signs of a recovery, John Lipsky, the IMF's first deputy managing director, said at a news conference.
"We do see the case for a vigorous response once the economy recovers," he said.
However, 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 warned.
In terms of economic policy, the IMF counseled the US government to forego a second stimulus plan to boost economic growth due to pressure 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.