IMF ups US growth forecast to 3.1%, but warns on deficit

WASHINGTON: The International Monetary Fund raised its forecast for US growth in 2010, while urging steps be taken to rein in an expanding budget deficit that risks pushing up interest rates. The world’s largest economy will grow 3.1% this year, up from a January forecast of 2.7%, the IMF said on Wednesday in its World Economic Outlook report. Growth will slow to 2.6% in 2011 as fiscal stimulus is removed, according to the Washington-based lender, which has rescued economies from Iceland to Pakistan since the start of the financial crisis.

Manufacturing is at the forefront of the US economic rebound as global demand strengthens. At the same time, an unemployment rate near a 26-year high may restrain gains in consumer spending, which accounts for about 70% of the economy.
“Substantial stimulus has supported the US recovery, but private demand remains muted and the labour market is unusually weak,” the IMF said its report. “Financial market conditions have normalised and the housing market has tentatively stabilised. But credit conditions, although no longer tightening, remain tight.” The jobless rate in the US will average 9.4% this year before retreating to 8.3% in 2011, the fund said. The unemployment rate in March was 9.7% for a third straight month, according to Labour Department data.

Government stimulus plans such as an auto-rebate programme and first-time homebuyer tax credits gave manufacturing and housing a boost in the second half of last year. The cash-for-clunkers plan to boost vehicle sales expired in August and the homebuyer tax credit ends on April 30.

The IMF estimates that President Barack Obama’s $862 billion stimulus programme boosted growth by about 1 percentage point in 2009, when the economy contracted 2.4%. The US expanded at a 5.6% pace from October through December, the fastest pace in six years, the Commerce Department said last month.

“When the recovery is solidly under way, fiscal consolidation should be a top priority,” the fund said. The IMF called the medium-term fiscal outlook “daunting,” forecasting that the budget deficit will be around 8% of GDP in 2020, and federal debt will exceed 100% of GDP, up from its current level of 85%. One approach to reducing government expenditures, the IMF said, is to build upon the Obama administration’s health-insurance overhaul.

“Health care reform will be essential to bring medical costs under control,” the IMF said. “The recent progress toward reform is welcome, including signs that it may contribute modestly to medium-term deficit reduction.”