United States: IMF Sees Tepid Recovery from Crisis

U.S growth is likely to remain moderate in 2012 and 2013

Uncertainty about the “fiscal cliff” and euro area crisis are main risks to outlook

Authorities need to reach agreement on medium-term plan to reduce the debt

The IMF’s U.S. team recently conducted its annual checkup of the U.S. economy, known as the Article IV consultation. IMF Survey magazine spoke with the head of the U.S. team, Gian Maria Milesi-Ferretti, about the risks hampering a recovery, how the government has been managing the U.S. economy, and when we should expect the housing market to turn around.

IMF Survey online: What is the outlook for the U.S. economy?

Milesi-Ferretti: We expect the U.S. economy to recover at a tepid pace in 2012 and 2013—at about 2 and 2¼ percent, respectively—in line with the very slow recoveries that we have seen in previous financial crises and housing busts.

But the outlook remains difficult. With house prices still weak, households are rebuilding their wealth by reducing debt, and therefore consumption growth will remain sluggish. Exports have been a bright spot in the recovery but going forward they are going to be restrained by weaker growth in trading partners and the stronger U.S. dollar. And the inevitable correction of the very large U.S. fiscal deficit will mean less spending and more taxes starting in 2012.

Unfortunately, we also see negative risks, in particular from a further deterioration of the euro debt crisis, as this would lower the demand for U.S. exports and hurt financial markets. The economy would also suffer if policymakers here in the United States were unable to reach agreement on raising the debt ceiling and avoiding the so-called fiscal cliff—the spending cuts and large-scale expiration of tax breaks that will kick in on January 1, 2013 if nothing is done.

But there could also be positive surprises if, with a less uncertain environment, the housing market were to pick up steam and firms were to ramp up their spending and hiring plans.

IMF Survey online: How concerned are you about the fiscal cliff?

Milesi-Ferretti: Policymakers should address the policy uncertainties related to the fiscal cliff as soon as possible. If the fiscal cliff materializes, the economic effects would be severe, as the U.S. economy would contract in early 2013 and negative spillovers would be felt around the world. Some unfavorable effects from the fiscal cliff could be felt later this year, as consumer and business spending may be...