IMF: Growth in US economy will remain weak through 2013

Economic growth in the United States will remain depressed over the next two years even if Congress and the White House find a way to avoid the “fiscal cliff” of tax increases and spending cuts at the end of the year, the International Monetary Fund (IMF) said Tuesday.

The IMF’s annual report on the U.S. economy forecasts “modest” 2 percent gross domestic product growth this year and 2.3 percent growth next year. The unemployment rate, according to the IMF, will be 8.2 percent this year and 7.9 percent in 2013.

The report also reflects fears that the U.S. recovery is losing steam. In April, the IMF had predicted slightly higher growth of 2.1 percent for 2012 and 2.4 percent for 2013.

While the numbers are ominous for President Obama’s reelection campaign, the IMF report also contains an upside for the president: The IMF essentially backs Obama’s “balanced approach” to the nation's economic woes.

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Like the administration, the IMF argues Congress and the White House should find a way to raise the debt ceiling soon to reduce uncertainty, should look to raise revenue levels from historic lows, and should do more to foster a housing recovery by supporting greater access to refinancing by homeowners.

The IMF also says near-term spending cuts should be replaced with “back-loaded” cuts in later years, and in the near term investments should be made in infrastructure and job training, which is another position held by Obama.

The IMF says its forecast of “strong headwinds” for the economy is based in part on weakness in private consumption because households are still paying off debts. It says that “business fixed investment seems to have lost some momentum” as well.

Things could get worse because the United States is “vulnerable to contagion” from the euro debt crisis and from the fiscal cliff. If the automatic spending cuts and tax increase take effect as scheduled in January, the IMF says it is possible that GDP growth will enter negative territory.

“It is critical to remove the uncertainty created by the 'fiscal cliff' as well as promptly raise the debt ceiling, pursuing a pace of deficit reduction that does not sap the economic recovery,” the IMF warns.

It states that even the pace of deficit reduction in Obama’s last budget — decried as woefully inadequate by the GOP — would be “too rapid, given the weak economy and downside risks.”

The IMF says it welcomes recent Federal Reserve decisions to continuing to try to drive down long-term interest rates. It says if the outlook worsens, "further easing may be considered."

On unemployment, the IMF says that long-term joblessness is “significantly above levels seen in previous recessions” and recommends investment in job training and tax credits for hiring. 

On financial-sector reform, the IMF urges Congress to adequately fund the institutions charged with carrying out the Dodd-Frank law. House appropriators are trying to defund the law by giving the Securities and Exchange Commission and Commodity Futures Trading Commission less money than they are seeking.