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IMF says US economy uncomfortably close to stall speed

The International Monetary Fund on Friday said that the growth of US economy was “uncomfortably close” to the 2% “stall speed” associated with past recession.

The fund, in its annual report on the United States, said it shared with the US authorities' view that the most likely scenario is a soft landing as growth recovers and inflation falls, “although both are subject to risks.” “The US slowdown has mainly reflected a drag from residential investment due to the ongoing housing market correction,” said the IMF report. “Consumption, by contrast, has remained strong, supported by solid employment and wage growth.” “Benign US financial conditions have minimized spillovers elsewhere and, with global activity supported by faster growth in the Euro area and Asia, the US current account deficit has stabilized, albeit at high levels,” it added.

Due to the slowdown, the IMF cut its forecast for US economic growth to 2% this year from the 2.2% estimate the fund issued in its World Economic Outlook two months ago. But the IMF predicted that the US economy would grow 2.75 % in 2008. “We, like the US authorities, expect a favorable outcome for US growth,” said John Lipsky, the IMF's leading deputy director, presenting the annual US economic report. “We expect to see a gradual reacceleration towards a sustained pace of around 3% by 2008,” he said.

The IMF said it has seen four main macroeconomic challenges facing the US economy: facilitating a soft landing for the economy; maintaining a sound and innovative financial sector; raising domestic savings and lowering the current account deficit, while resisting protectionism and tackling the key longer-term fiscal challenge of rising entitlement spending. The IMF also called on the US authority to resist protectionism and to make efforts to promote free trade. “The commitment of (US) policymakers to embrace globalization has ensured that these benefits are shared with the rest of the world,” said the report. “Even so, policymakers will need to come to grips with the need to maintain a robust financial system, eliminate the fiscal deficit, reform the tax system and, most importantly, make entitlement programs sustainable,” it added. (