IMF Sees Fiscal Cliff & Euro Crisis As Key Risks To US Growth in 2012 & 2013

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The International Monetary Fund still sees growth remaining positive throughout 2012 and 2013.  Unfortunately, this pesky “fiscal cliff” and the Euro area crisis are listed as the main risks to the IMF expectations.  The end suggestion is the same that the rest of us could tell you as well: Authorities need to reach an agreement on medium-term plan to reduce the debt.

The IMF warned about increasing risks by saying, “The U.S. recovery continues to be tepid. At the same time, risks have intensified, including from the worsening of the euro area crisis as well as the uncertainty over domestic fiscal plans.”

Today’s assessment is from its annual checkup of the U.S. economy is after speaking with the head of the U.S. team, Gian Maria Milesi-Ferretti.

On the outlook for the U.S. economy, Milesi-Ferretti said, “We expect the U.S. economy to recover at a tepid pace in 2012 and 2013—at about 2 and 2¼ percent, respectively—in line with the very slow recoveries that we have seen in previous financial crises and housing busts.  But the outlook remains difficult. With house prices still weak, households are rebuilding their wealth by reducing debt, and therefore consumption growth will remain sluggish. Exports have been a bright spot in the recovery but going forward they are going to be restrained by weaker growth in trading partners and the stronger U.S. dollar. And the inevitable correction of the very large U.S. fiscal deficit will mean less spending and more taxes starting in 2012.”

As far as the Euro and fiscal cliff, this was stated as, “Unfortunately, we also see negative risks, in particular from a further deterioration of the euro debt crisis, as this would lower the demand for U.S. exports and hurt financial markets. The economy would also suffer if policymakers here in the United States were unable to reach agreement on raising the debt ceiling and avoiding the so-called fiscal cliff—the spending cuts and large-scale expiration of tax breaks that will kick in on January 1, 2013 if nothing is done.”

Milesi-Ferretti said regarding the Fiscal Cliff, “Policymakers should address the policy uncertainties related to the fiscal cliff as soon as possible. If the fiscal cliff materializes, the economic effects would be severe, as the U.S. economy would contract in early 2013 and negative spillover would be felt around the world… consumer and business spending may be held back by the uncertainty about tax rates and government spending levels… the best thing that policymakers can do before the year-end is to reach agreement on a medium-term plan to reduce the debt to more sustainable levels through a gradual reduction of the deficit. In addition, the federal debt ceiling should be raised well ahead of the deadline, to alleviate the risks of financial market disruptions and a loss in consumer and business confidence.”

The rest of the report can be accessed here.

JON C. OGG