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Fri, Aug 01, 2008 - Page 10 News List

IMF predicts gradual recovery in US

PRAISE AND WARNING While calling for further steps to end the financial turmoil, the IMF praised US authorities for their ‘swift policy response’ to the housing slump


The IMF said on Wednesday the US is poised for a gradual economic recovery next year, 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 percent this year and 0.8 percent next year, 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, speaking in a conference call with reporters, said the assessment took into account a broad housing rescue bill signed by US President George W. Bush on Wednesday.

The official, speaking on condition of anonymity, criticized 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-country institution also recommended that the US take up a financial reform that “could include further consolidation and specialization of regulatory institutions.”

The IMF strongly endorsed the Federal Reserve’s actions to ease credit, but counseled 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 toward 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 percent at its meeting on Tuesday.

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