IMF Lifts Growth Estimates But Stresses Risks

By Staff Reporter | Apr 17, 2012 04:30 PM EDT

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The economy has begun to get some traction, the International Monetary Fund said on Tuesday, though it still faces an array of homegrown and international risks, including a possible worsening of Europe's debt crisis.

In its World Economic Outlook published in advance of semiannual meetings, the IMF said it foresees growth at 2.1percent this year and rising to 2.4 percent in 2013.

That is modestly higher than the growth rates of 1.8 percent and 2.2 percent respectively that the IMF had forecast in January for the world's largest economy.

"The economy has gained some traction, with growth improving through 2011 and signs of expansion in the job market," the IMF said. "Risks are more balanced but still tend to the downside given fiscal uncertainty, weakness in the housing market, and potential spillovers from Europe."

The IMF added that "bold policy measures" in the housing market could help accelerate recovery, but did not specify what measures it thought would have the most impact.

There is debate within the United States about whether outright reductions in mortgage balances for so-called underwater homeowners, who owe more than they could get for their houses, would relieve some stress on consumers.

The IMF noted that inability to agree on a medium-term plan for tackling high budget deficits and the issue of what to do about expiring tax cuts passed during the former Bush administration also could undermine market confidence and affect growth.

In addition, Europe remains a concern if its situation worsens.

"A flare-up in the euro area from increased sovereign and bank stress could easily undermine confidence in the corporate sector and thereby squeeze investment and demand," the IMF said.

It said the Federal Reserve's recent decision to announce an inflation target of 2 percent could be helpful in better anchoring inflation expectations but the central bank may need to do more if conditions worsen.

"It should also stand ready to implement unconventional support if activity threatens to disappoint, so long as inflation expectations remain subdued," the IMF said.

Households are feeling pressure to reduce their debt loads while home prices remain weak and the prospects for job creation this year and next are "modest" at best, the IMF said.

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