IMF Expecting Gradual 2009 US Recovery

Source : The Business Times, August 1, 2008

But it urges more action to ease economic turmoil

(WASHINGTON) The International Monetary Fund said on Wednesday that the United States is poised for a gradual economic recovery in 2009, but urged more action to ease the housing crisis and financial turmoil.

'The housing correction and the broader financial sector turmoil of recent months have weakened household demand and credit conditions,' the IMF said in its annual review of the world's largest economy.

The IMF board of executive directors praised the US authorities' 'decisive and swift policy response' to the colliding shocks from the worst housing slump in decades and the broader financial turmoil of recent months, as well as higher energy prices.

'With added headwinds from oil prices, the US economy will be notably weaker but still register positive growth in 2008, and will recover only gradually in 2009,' the IMF said.

The IMF reaffirmed its growth forecasts of 1.3 per cent in 2008 and 0.8 per cent in 2009, released in the July 17 update of its April World Economic Outlook report.

Although short-term inflation expectations have risen 'somewhat' on surging commodity prices, price pressures are expected to be contained as commodity prices peak and demand wanes.

'Housing prices are continuing to fall, and there is a risk that such prices could move significantly below equilibrium, with important macroeconomic consequences,' the IMF said.

Directors advised the US government to 'be prepared to widen support for housing and, if serious dislocations reappear, for financial markets'. 'The housing boom has revealed multiple weaknesses in the current regulatory system,' it said. A senior IMF official said the assessment took into account a broad housing rescue bill signed by President George W Bush on Wednesday.

The official criticised the new law's measure that provides public funds to allow lenders to voluntarily reduce the amount of an outstanding mortgage in order to reduce preventable disclosures as not going far enough. 'The decision of lenders is completely voluntary. The question is are there sufficient incentives to do so,' the official said.

The 185-nation institution also recommended the US take up a financial reform that 'could include further consolidation and specialisation of regulatory institutions'.

The IMF strongly endorsed the Federal Reserve's actions to ease credit, but counselled that 'monetary policy should stay on hold for now, unless economic and financial conditions deteriorate further'.

However, if inflationary expectations spiral, 'the bias should be towards a decisive tightening once recovery is established and financial conditions ease'. The Fed is widely expected to hold its key short-term interest rate at 2.0 per cent at its Aug 5 meeting. -- AFP