High unemployment and a moribund housing market are constraining the U.S. economic recovery, while the public debt looms large on the horizon and needs to be addressed, the International Monetary Fund said on Thursday.
The IMF raised its U.S. growth forecast slightly to 3.3 percent for 2010 and 2.9 percent for 2011, but said unemployment would remain above 9 percent for both years and inflation would remain low.
In a statement released after its annual consultations with U.S. government authorities, the IMF said recovery from recession had become well established due to a powerful fiscal and monetary policy response.
The outlook has improved in tandem with recovery, but remaining household and financial balance sheet weaknesses -- along with elevated unemployment -- are likely to continue to restrain private spending, the fund said.
The IMF said the key challenge for the United States was to develop a credible fiscal strategy to ensure that public debt was seen to be put on a sustainable path without jeopardizing the recovery.
The fund forecast U.S. federal debt as a percentage of GDP would rise from 64 percent in 2010 to 72.4 percent by 2012 and 96.3 percent by 2020. It welcomed commitments by the Obama administration to stabilize this at just over 70 percent of gross domestic product by 2015 but called for a downward path after that, a step that would require both spending cuts and increased revenues.
It endorsed planned immediate measures to reduce the budget deficit, but said these should be designed to have the smallest impact on demand. It also said longer term measures were needed to address entitlement pressures, such as imbalances in the Social Security pension system.
It said the biggest contribution the United States could make to global growth and stability would be to increase its domestic savings -- particularly by reducing deficits -- and said the U.S. could no longer serve as the world's consumer. This would require domestic demand growth in exporting countries, the Fund said.
With the U.S. dollar now moderately overvalued from a medium term perspective, this will need to be accompanied by greater exchange rate flexibility/appreciation elsewhere, the IMF added.
(Reporting by David Lawder; Editing by Neil Stempleman)