IMF sees no US growth through 2010

[LRE]

* Despite large cuts in policy interest rates, credit is exceptionally costly or hard to get for many households and firms, says IMF

WASHINGTON: The IMF unveiled a darker outlook for the US economy Wednesday than just three months earlier, forecasting a deeper recession in 2009 and no growth at all in 2010.

The International Monetary Fund sharply downgraded its outlook for the world’s biggest economy, predicting a decline in output of 2.8 percent for all of 2009 and zero growth for 2010.

The latest figures in the IMF’s semiannual World Economic Outlook report were cut from the IMF’s January update by 1.2 percentage points for 2009 and 1.6 points for 2010. The forecasts are far more pessimistic than those from the US Federal Reserve, White House, congressional experts and many private economists.

“Despite large cuts in policy interest rates, credit is exceptionally costly or hard to get for many households and firms, reflecting severe strains in financial institutions,” the IMF report said. “In addition, households are being hit by large financial and housing wealth losses.” US gross domestic product (GDP) fell at an annualised pace of 6.3 percent in the fourth quarter of 2008 and the IMF noted that “recent data suggest another substantial drop in the first quarter of 2009.”

“There have been some tentative signs of improving business sentiment and firming consumer demand, but employment has continued to fall rapidly — 5.1 million jobs have been lost since December 2007 — pushing the unemployment rate to 8.5 percent in March.” The IMF report said the US central bank has cuts its base rate to virtually zero, effectively exhausting its main tool of monetary policy and is now using unconventional methods to stimulate the ailing economy.

The IMF cited both ‘upside’ and ‘downside’ risks to its forecast. It said that the economy could recover more quickly if financial conditions improve but also cited a “potential for further intensification of the negative interaction between the real and financial sides of the economy.”

“The housing sector could continue to deteriorate, further declines in asset values could increase insolvency problems for banks and further reduce credit availability, deflation could raise real debt burdens, and demand from other economies could fall more than anticipated,” the report noted.

It said the most pressing policy issue is “to restore the health of the core financial institutions” and to “break the cycle of falling asset prices, rising losses in financial institutions, and tighter credit.” The Washington-based IMF said it remains unclear whether a plan by President Barack Obama’s administration for a public-private partnership to buy up “toxic” assets in the financial system will work. “The challenge for any public attempt to remove bad assets is to induce banks to sell them — shareholders will be unwilling to accept ‘fire-sale’ prices — while not paying too high a price, which would amount to a taxpayer subsidy to bank owners and bondholders and could quickly exhaust Troubled Asset Relief Program (TARP) funds.”

The IMF outlook is far bleaker than many official and private forecasts. The budget proposed by the White House projects an economic contraction of 1.2 percent in 2009 and assumes growth of 3.2 percent in 2010. That outlook compared with the Blue Chip consensus forecast, an average forecast of 50 private economists, that foresees a 1.9 percent decline in 2009 and growth of 2.1 percent in 2010.

The Federal Reserve is calling for the economy to recover ‘gradually’ during the second half of 2009 albeit shrinking between 0.5 percent and 1.3 percent for the full year. The central bank predicted growth would accelerate to between 2.5 percent and 3.3 percent for 2010. Some analysts say the most recent data suggest some steadying in the economy, and some have upgraded their forecasts.

The private research firm IHS Global Insight this week predicted a contraction of 3.5 percent for the US economy in 2009 followed by growth of 1.4 percent in 2010. “The United States will be pivotal in leading the global economy out of recession,” the IHS report said. “The good news is that it will be one of the first countries to recover.” afp


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