ISLAMABAD: The United States recovery continues to be tepid. At the same time, risks have intensified, including from the worsening of the euro area crisis as well as the uncertainty over domestic fiscal plans.
The International Monetary Fund (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.
“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,” said Milesi-Ferretti.
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.