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IMF: U.S. Plunge From Fiscal Cliff Would Hit Global Economy Hard
2012-08-02 15:27:31 (212 weeks ago)
Posted By: Intellpuke

Political infighting over the "fiscal cliff" threatens to wipe out the U.S.'s fragile recovery with "very bad" consequences for the rest of the world, a senior International Monetary Fund (IMF) economist warned Thursday.

Updating its annual report on the U.S. economy, the IMF said the recovery remained "tepid", and risks to that recovery had intensified, "including from the worsening of the euro area debt crisis as well as the uncertainty over domestic fiscal plans."

The IMF is particularly concerned about falling off the fiscal cliff. Unless a deal is struck by December 31, Bush-era tax breaks will be dropped and a series of draconian spending cuts imposed. The tax rises and cuts to areas including defense could wipe 3.9% off the U.S.'s growth rate next year, according to the congressional budget office.

In a conference call Gian Maria Milesi-Ferretti, who heads the IMF's U.S. team, said arguments over the so-called "fiscal cliff" had the potential to wipe out growth in the U.S. next year and push the country back into recession. "That would be a very bad outcome for the U.S. economy and the rest of the world," he said.

The IMF is predicting 2.25% growth in U.S. gross domestic product next year. "If you go from two and quarters to zero or negative, that's a sizable shock," said Milesi-Ferretti. The fiscal cliff "can be avoided and it should be avoided," he said.

The IMF published its annual checkup of the U.S. economy, known as the Article IV consultation, last month. The latest update comes after it has been assessed by member countries including China and the U.K. and follows a set of dispiriting reports on jobs growth and manufacturing in the U.S.

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On Wednesday the U.S. Federal Reserve said it had noted further weakening in the U.S. and was prepared to act but stopped short of doing so. The move disappointed US investors and led to a sell-off in U.S. markets.

The IMF's directors said the Fed had room to further ease monetary policy but a number of directors noted "the effectiveness of additional monetary easing could be limited in the prevailing very low interest rate environment."

Europe's woes would continue to weigh on the U.S. recovery, said Milesi-Ferretti, slowing exports and strengthening the dollar to levels that make U.S. goods less attractive.

Milesi-Ferretti sounded an optimistic note for the medium term and said rising demand for housing would eventually lead to a recovery in the U.S. housing market.

The U.S. is now building around 700,000 new homes a year and will need to build 1.5m a year in the near future, he said. He estimated recovery could take three to five years.

Intellpuke: You can read this article by Guardian U.S. Business Correspondent Dominic Rushe, reporting from New York City, N.Y., in context here:

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