IMF: U.S. Recovery ‘Remains Tepid’ Due to Euro Crisis, U.S. Politics

“The U.S. recovery remains tepid and subject to elevated downside risks, in light of financial strains in the euro area and uncertainty over domestic fiscal plans,” the report by the IMF says. “Against this background, policies need to decisively tackle medium-term challenges while using the available room to support the recovery.”

The IMF believes that growth will remain “modest” in the next two years, “constrained by household deleveraging, fiscal restraint, and subpar global demand.” Real GDP growth is expected to grow 2% in 2012 and 2.3% in 2013. Previously, the IMF GDP projected growth of 2.1% in 2012 and 2.4% in 2013.

There are two major risks to growth, according to the IMF. Lingering effects of the European debt crisis could impact the U.S. The other major concern is a political stalemate in Congress on the federal budget and tax cuts. If Congress cannot agree on what to do with automatic spending cuts and tax increases next year, the IMF says that GDP growth could be less than 1% in 2013, with a recession taking place early in the year.

The IMF warns that budget cutting currently set to take place by law at the end of the year would hamper economic growth. It also calls for the debt ceiling to be raised in 2013 in order for the U.S. to avoid “a fiscal cliff.”

Samuel Weigley