IMF upgrades economic forecast for U.S.

The International Monetary Fund slightly upgraded its forecast for the U.S. economy Monday but cautioned that both financial and economic indicators remain weak and warned of significant downside risk to a recovery that will already be sluggish by historical standards.

The IMF now expects the U.S. economy will decline by 2.5 percent this year, not as steep as the 2.8 percent drop it projected in April. While its April forecast called for zero growth in 2010, its recent review projects that the economy will now grow by 0.75 percent next year.

The extraordinary stimulus from monetary and fiscal policies was necessary in the near term, the IMF said. But it also warned that these policies “may stoke concern about inflation and rising debt” in the longer term. The IMF expects U.S. budget deficits to average 9 percent of gross domestic product over the 2009-2011 period, as publicly held debt nearly doubles to 75 percent of GDP.

The balance of risks is still tilted to the downside, the IMF said. Among the downside risks, it cited home foreclosures, further declines in house prices, rising unemployment, deteriorating commercial real estate markets and upward pressure on interest rates.

Yields on 10-year Treasury notes, which plunged to nearly 2 percent late last year, hit the 4 percent mark last week. And Freddie Mac reported Thursday that 30-year, fixed-rate mortgages jumped to 5.59 percent last week, compared with 4.82 percent three weeks earlier.

“Economic indicators point to a decelerating rate of deterioration, particularly in labor and housing markets, both of which are key to economic recovery and financial stability,” the IMF said in its latest review.

The U.S. economy plunged at annual rates of 6.3 percent in the fourth quarter and 5.7 percent in the January-March period. Looking ahead, the IMF’s forecast is more pessimistic than others.

“The consensus among forecasters is the economy will contract less than 2 percent, squeeze out less than 1 percent growth in the third quarter, and expand at about a 2.5 percent annual pace after that,” said Peter Morici, a business professor and forecaster at the University of Maryland. “That is a very modest pace after such a steep decline and much less than the 3.5 percent to 4 percent necessary to power rising living standards for most workers.”

The Obama administration forecasts that the economy will decline only 1.2 percent in 2009, grow by 3.2 percent next year and then expand an average of 4.3 percent per year over the 2011-2013 period.

Rising unemployment, which the IMF projects will peak at “close to 10 percent” in 2010, should keep a lid on inflation. The IMF expects consumer prices to fall by half a percent in 2009 and rise just 1 percent in 2010.

The IMF report said the U.S. dollar was only modestly overvalued. John Lipsky, the IMF’s first deputy managing director, told reporters Monday that the dollar would remain the world’s main reserve currency “as far as the eye can see.”