RTTNews - Recovery in the U. S. economy is likely to be gradual with risks tilted to the downside, the International Monteary Fund said on Friday.

In a statement, the Washington-based lender said, As a result of their increasingly strong and comprehensive policy measures, the sharp fall in economic output seems to be ending, and confidence in financial stability has strengthened.

Nevertheless, with financial strains still elevated, the recovery is likely to be gradual, and risks are tilted to the downside.

The report is based on the Article IV consultation that IMF's Executive Board carried out with the U. S., which concluded on July 24.

Data released on July 31 showed that U.S. gross domestic product, a closely watched measure of broad economic performance, fell at a pace of 1% for the second quarter, marking the fourth consecutive quarter of contraction. But, the pace slowed considerably from the 6.4% decline that was seen in the first three months of the year.

The lender expects the world's largest economy to shrink 2.6% this year before expanding 0.8% in 2010. The IMF board is of the view that potential growth could remain well below past trends for a considerable period.

Commending the steps taken by U. S. authorities to stabilize financial conditions and help restore confidence, IMF board said continued close montioring and regular stress tests to evaluate vulnerabilities are needed. According to the board, balance sheet cleaning remained a priority and more steps might be required to encourage writedowns of underwater mortgages. Thats said, the board urged authorities to take care to avoid moral hazard.

Further, the IMF board said an eventual unwinding of macroeconomic polices would have to wait until an economic recovery is clearly underway.

If downside risks materialize, additional credit easing and a strengthened commitment to maintaining a highly accommodative monetary stance could be considered.

Additional fiscal stimulus could also be used, although the immediate focus should be on implementing the current fiscal measures and monitoring their impact.

A key priority would be to devise comprehensive exit strategies to unwind the extraordinary crisis-driven interventions, the IMF said. The clear communication of exit strategies, along with international coordination, is expected to bolster market confidence and facilitate a smooth exit.

With public debt set to rise substantially over coming years, IMF said the U. S. needs an ambitious medium-term fiscal consolidation to secure fiscal sustainability and an adjustment most likely on the revenue side. An IMF report earlier in the week said the budget deficit in the U.S. would be 13.5% of the gross domestic product, the highest among the world's top 20 advanced and emerging economies. However, the deficit is expected to decrease to 9.7% of GDP in 2010. 

In its staff report, the IMF said the U.S. dollar is moderately overvalued, although the assessment was subject to unusually high uncertainty.

For comments and feedback: contact editorial@rttnews.com