IMF raises US growth forecast, hedges bets on recession

Business Materials 21 June 2008 04:12 (UTC +04:00)

The United States economy will be virtually stagnant through much of 2008, the International Monetary Fund predicted on Friday, but avoided talk of a recession and significantly raised its growth forecast of only three months ago.

The IMF said US growth over this year would be a little above 1 per cent, up from an April forecast of 0.5 per cent. For 2009, the international crisis lender expects US growth of 0.8 per cent, compared to 0.6 per cent in April.

In its annual staff report on the US economy, IMF economists praised US lawmakers for a swift policy response to the housing and financial crisis that has prompted a drastic economic slowdown in the United States.

The Federal Reserve has slashed interest rates by 3.25 percentage points since September but investors have speculated the central bank could raise its benchmark rate again at its board meeting next week in response to increasing inflation fears.

The improved US growth outlook, combined with a surge in energy and commodity prices, suggest monetary policy should be "on hold" for the time being, the IMF said.

John Lipsky, the IMF's deputy managing director, pulled back from the Washington-based institution's earlier prediction of a "mild recession" this year in the world's largest economy.

Lipsky said growth would be "stagnant" for the second half of 2008 and warned that all of the world's advanced economies were expected to experience "below trend" growth this year for the first time in decades.

That compares with continuing "above trend" growth in most developing countries, which has been a peculiarity of this year's global economic downturn and a sign that emerging nations are becoming increasingly independent.

The IMF's World Economic Outlook in April said the US economy would contract by 0.7 per cent in the time period that starts with the fourth quarter in 2007 and ends with the fourth quarter in 2008. Now, the group expects growth to be flat over the same period.

In 2007, the US economy grew by 2.2 per cent.

"All things considered ... the US economy has held up well," Lipsky told reporters, adding that the US had successfully avoided the "hard landing" usually associated with heavy shocks to the system.

Financial institutions have suffered nearly 400 billion dollars in writedowns of mortgage-backed assets, due to a collapse of US housing prices since early 2007, which prompted a record number of home foreclosures across the country, dpa reported.