IMF Survey: U.S. Economy Seen Stabilizing, But Risks Remain
IMF News, June 15, 2009
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- Published: June 15, 2009
Overview
- Publication: IMF Survey online, June 15, 2009.
- Main assessment: A strong monetary and fiscal policy response is supporting the U.S. economy, but the immediate outlook remains weak, with a solid recovery beginning in the middle of next year.
- Final report timing: A final report will be issued once it has been discussed by the IMF’s 24-member Executive Board in late July.
- Key quoted judgment: “Recent data suggest that the sharp fall in economic activity has slowed notably, while financial conditions have improved noticeably. Correspondingly, we are revising our forecast upward, although its broad contours remain unchanged. We anticipate stagnation and economic activity in the coming quarters before a sustainable recovery takes hold next spring,” John Lipsky, First Deputy Managing Director of the IMF.
Short-term outlook and forecasts
- GDP projection: GDP is expected to contract by 2.5 percent in 2009, followed by a modest expansion in 2010.
- Fiscal stimulus impact: The fiscal stimulus package would boost annual GDP growth by 1 percent in 2009 and a quarter of a percent in 2010.
- Near-term risks highlighted:
- More foreclosures and further drops in housing prices.
- Rising unemployment.
- Higher interest rates.
- Assessment of current conditions:
- Financial system has stabilized.
- Downward slide in labor and housing indicators has slowed.
- Short-term outlook remains uncertain.
Financial system, banks, and housing market
- Bank sector measures and effects:
- Bank stress tests conducted by the Federal Reserve and the Treasury and capital injections have raised confidence in the stability of major financial institutions.
- Recommendation: Close monitoring of the financial system should continue, with regular stress tests to evaluate potential weaknesses.
- Recommendation: Quick implementation of the proposed resolution framework for nonbank financial institutions to strengthen the process for unwinding large, troubled financial institutions.
- Housing market developments:
- Efforts to stabilize the housing market have helped bring down mortgage rates over recent months, though they have risen recently.
- Government efforts to encourage mortgage modifications for distressed homeowners should provide further help, though the extent to which they can stem the flood of foreclosures remains to be seen.
Policy recommendations and exit strategy
- Three linked challenges the U.S. faces:
- Completing economic and financial stabilization to set the stage for ongoing recovery.
- Developing strategies for unwinding massive public interventions, which should be coordinated with other countries.
- Addressing long-term legacies of the crisis: a revamped financial system, fiscal imbalances and weakened household finances.
- Exit strategy priorities as conditions normalize:
- Unwinding monetary stimulus.
- Shrinking government support for the financial sector by gradually tightening access to encourage institutions to access markets.
- International coordination among countries in unwinding financial sector support will be essential for a smooth exit.
Longer-term legacies and structural issues
- Financial sector reform:
- IMF welcomed the U.S. proposal for a systemic risk regulator.
- Suggested accompanying measures to discourage institutions’ complexity, interconnectedness and size to limit systemic risks and moral hazard.
- IMF will begin a deeper assessment of the U.S. financial system and regulations in the Financial Sector Assessment Program beginning in the fall.
- Fiscal outlook and public finances:
- The crisis has led to a deterioration in U.S. public finances and put upward pressures on long-run interest rates.
- The U.S.’s 2010 budget lays out objectives including an early stabilization of debt relative to GDP, but is based on relatively optimistic economic assumptions.
- IMF estimates suggest that significant additional measures will be needed to ensure its targets are met.
- Looming challenges from entitlement spending; U.S. authorities’ aim to undertake health-care reforms is especially welcome.
- Recommendation: Proposals for universal health care should be accompanied by strong measures to achieve the goal of reducing cost growth by 1.5 percent annually.
- Global implications and role of U.S. consumption:
- Very large decline in U.S. household wealth has led to a strong pickup in household savings, which seems likely to continue.
- Expected result: a sustained reduction in the U.S. current account deficit.
- Implication: The U.S. consumer will no longer be the global buyer of last resort, suggesting other regions will need to play an increased role in supporting global growth and adjustment.
IMF Survey: U.S. Economy Seen Stabilizing, But Risks Remain — IMF Survey online, June 15, 2009.