High unemployment and a moribund housing market have increased risks to the U.S. economic recovery, while the public debt looms large and needs to be cut, the International Monetary Fund said on Thursday.
In a statement after annual consultations with U.S. authorities, the IMF raised its U.S. growth forecasts slightly to 3.3 percent for 2010 and 2.9 percent for 2011, but said unemployment would remain above 9 percent for both years.
The lofty jobless rate, coupled with a large backlog of home foreclosures and high levels of negative home equity, posed risks of a double dip in the housing market, it said. But the IMF said it did not think a renewed recession was likely.
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 also said commercial real estate continued to deteriorate, posing risks for smaller banks. Further tipping the balance of risks to the downside, it said Europe's sovereign debt crisis could worsen financial market conditions and hurt trade.
David Robinson, the IMF's Western Hemisphere deputy director, conceded in a news briefing that recent data had come in on the weak side since the report was completed on June 21. If the weakness continued, the Fund may have to revise its forecasts downward, he said.
In a separate report on the world economy, the IMF raised its 2010 global growth forecast to 4.6 percent from the 4.2 percent it had projected in April.
Apart from dealing with economic risks, the IMF said the key challenge for the United States was to develop a credible strategy to put its budget on a sustainable path without jeopardizing the recovery.
The fund said U.S. federal debt as a percentage of gross domestic product would rise from 64 percent in 2010 to 72.4 percent by 2012, 96.3 percent by 2020 and 135 percent by 2030.
It welcomed commitments by the Obama administration to stabilize this at just over 70 percent of GDP by 2015 but called for a downward path after that, a step that would require both spending cuts and increased revenues.
The IMF 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.
The U.S. is no longer going to be the global consumer of last resort and therefore other countries, especially those with current account surpluses, will need to take up the slack, Robinson said.
With our assessment that the dollar is now somewhat overvalued from a medium-term perspective, I emphasize medium-term, this will also need to be accompanied by greater exchange rate flexibility and appreciation elsewhere, he added.
Robinson said he believed the dollar's value would decline moderately over the next five years based on economic fundamentals. The dollar's rise in recent months was not helpful in sustaining global recovery but was not a deal breaker either, he said.
The Fund said the Federal Reserve's pledge to keep interest rates exceptionally low was appropriate to fight deflation and the drag on the economy from reduced government spending, but said the U.S. central bank must clearly communicate its plans for exiting its supportive policies.
The IMF also said that while the United States has made considerable progress in restoring financial stability, more capital will be needed in the banking system to support additional lending -- particularly if securitization markets remain impaired.
It said U.S. financial reform legislation would reduce systemic risks in the financial system, but noted that Congress missed an opportunity to consolidate bank regulators, maintaining a burden on agencies to cooperate and avoid gaps in supervision.
(Additional reporting by Emily Kaiser, Tim Ahmann and Lesley Wroughton; Editing by Andrea Ricci)