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Stimulus to slightly boost US economy

The International Monetary Fund said a heavy dose of stimulus would ease the US recession this year and lift growth marginally in 2010.

It said the US dollar was only modestly above the level implied by medium-term fundamentals and its value would depend on foreign appetite for US assets.

In its annual consultation with the United States, the IMF said policy-makers were correct to keep stimulus flowing for now, but would need to turn their attention to the threat of ballooning deficits once the crisis has passed.

“The combination of financial strains and ongoing adjustments in the housing and labor markets is expected to restrain growth for some time, with a solid recovery projected to emerge only in mid-2010,” the IMF said at the conclusion of annual discussions with the US

The Fund projected the US economy would contract by 2.5% this year, with a modest expansion in 2010 of 0.75%. This compares to the IMF's April forecast for the United States, which projected the economy to shrink by 2.8% in 2009 and show zero growth next year.

It said Washington's fiscal boost would lift annual gross domestic product by 1% in 2009 and 0.25% in 2010.

Still, the IMF said the outlook for the US economy is marked by an unusual level of uncertainty and a recovery could be clouded by further home foreclosures and falls in house prices along with rising unemployment.

If economic activity failed to pick up, the IMF said additional fiscal stimulus measures should be considered while the US Federal Reserve should maintain its current level of low interest rates.

As the economy starts to strengthen and a recovery is clearly under way, the IMF said the US should develop and communicate an exit strategy to withdraw monetary stimulus.

The Fund forecast that over 2009-2011 the federal deficit will average 9% of gross domestic product and that debt held by the public will nearly double to 75% of GDP. (Reuters)