US economic recovery `tepid’: IMF

The US economic recovery has remained tepid following the global financial crisis and growth is expected to be subdued at 1.7 per cent this year as the government's fiscal consolidation policies continue, the International Monetary Fund (IMF) said in its regular review yesterday.

The IMF welcomed the improvement in the underlying conditions of the US economy, which boded well for a gradual acceleration of growth, while noting that the balance of risks to the outlook remains tilted to the downside.

''While policymakers in congress averted the fiscal cliff at the beginning of 2013, the expiration of the payroll tax cut and implementation of across-the-board spending cuts are weighing significantly on growth this year, with growth in the first quarter of 2013 at 1.8 per cent and indicators suggesting slower growth in the second quarter,'' the report said.

The fund is optimistic that economic activity would accelerate as the powerful headwinds subside and the country would post a 2.7-per cent growth next year.

The unemployment rate, which has been decreasing steadily from 10 per cent in 2010, is currently at 7.5-7.6 per cent. It is likely to remain broadly stable in 2013 and fall gradually next year.

Inflation is expected to pick up somewhat but will remain below the Federal Reserve's long-term threshold of 2 per cent.  

Broadly, economic recovery has been helped by a buoyant stock market as well as the housing and labour markets. Stock indices have risen around 16 per cent since the beginning of the year while house prices have increased by more than 10 per cent over the past one year.

To a large extent this owes to very easy financial conditions, with the Federal Reserve continuing to add monetary policy accommodation over the past 12 months, the IMF said.

However, the fund cautioned that downside risks remain in case the impact of fiscal consolidation and increase in interest rates are more than anticipated and the external environment remains weaker.

In contrast, the recovery could be stronger if the housing prices and mortgage conditions improve on the back of stronger consumption and investment.

The fund has noted the Federal Reserve's strategy of maintaining monetary stimulus for a considerable time after the economy strengthens and its plans for a gradual and sustainable reduction in the budget deficit so as to put the public debt ratio on a downward path.

Health of the US banks has improved significantly over the past 12 months although some vulnerability could emerge due to persistently low interest rates, the report said.

The IMF's assessment of the US economy is in stark contrast to its review of the eurozone released a day earlier.

The IMF warned that an anticipated end of the US stimulus could reignite the European debt crisis, by leading to pro-cyclical increases in borrowing costs within the area.

Incomplete or stalled policy commitments at the national or euro area level could also reignite financial market stresses. Over the medium-term, there is a high risk of stagnation, especially in the periphery, the IMF said.

As a consequence, eurozone GDP is expected to contract by 0.6 per cent for a second consecutive year in 2013, before expanding modestly by 0.9 per cent in 2014.