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IMF / US ECONOMY
STORY: IMF / US ECONOMY
TRT: 2.46
SOURCE: IMF
RESTRICTIONS: NONE
LANGUAGE: ENGLISH / SPANISH / NATS
DATELINE: 25 JULY 2011, WASHINGTON DC
RECENT, IMF HEADQUARTERS, WASHINGTON DC
1. Wide shot, IMF Headquarters
25 JULY, 2011, WASHINGTON, DC
2. SOUNDBITE (English) Gian-Maria Milesi-Ferretti, Western Hemisphere Department, International Monetary Fund:
“So U.S. growth is going to improve relative to the slow pace in the first half of the year, but it’s not going to be great. We project it to be around 2-1/2 percent for this year and to accelerate a little bit into next year. The main obstacle to U.S. growth is the very difficult situation of the housing market and its implications for consumers’ willingness to spend. The housing prices are continuing to fall. This tends to reduce the wealth of consumers and their willingness to spend.”
RECENT, WASHINGTON DC
3. Wide shot, Congress building
25 JULY, 2011, WASHINGTON, DC
4. SOUNDBITE (English) Gian-Maria Milesi-Ferretti, Western Hemisphere Department, International Monetary Fund:
“Well, in short, the U.S. should raise taxes and cut spending. They have a very big task ahead because the fiscal deficit is very large and this task cannot be accomplished, in our view, by just cutting spending or just raising taxes. You will need a bit of both. And given the magnitude of the task ahead and the fact that the recovery is still quite weak, you don’t want to do everything at once. You want to make sure you have a well-established plan that stretches over several years, but you don’t want to have dramatic cuts to spending in the short run, in the next year or so, when the recovery is still quite weak.”
RECENT, ARLINGTON, VA
6. Med shot, woman hands over a resume a job fair
RECENT, WASHINGTON DC
7. SOUNDBITE (Spanish) Rodrigo Valdes, Principal Advisor, International Monetary Fund:
“The key is first in growth, and as the economy recovers unemployment will reduce. The US labour market is not particularly flexible, so there aren’t any silver bullets for intervention and solutions; but we do think that something could be done to reduce the unemployment situation of people who have been jobless for a longer time, because those persons lose their work capacity and that has long term consequences.”
8. Wide shot ATM
9. SOUNDBITE (Spanish) Rodrigo Valdes, Principal Advisor, International Monetary Fund:
“United Status is a large country thus the repercussions in the rest of the country are particularly important. In this report we recommend two key areas. One is fiscal policy, making a fiscal adjustment will help global imbalances -the issue that some countries save a lot and others little- gradually solve themselves, what would seem a credible plan, and moving ahead, is to avoid interest rates from increasing in the future with negative repercussions for the rest of the world. Also we have suggested to be particularly careful with the implementation of reforms to the financial system. The US financial system is very important for the rest of the world and we all have personal interest in it working well.”
10. Close-up, IMF seal
The U.S. economy continues to recover at a modest pace, but has hit a soft patch. Concerns about risks, including the lack of a credible deficit reduction plan, persist, the IMF said after wrapping up its annual
review of the world’s largest economy.
On balance, the IMF expects U.S. growth to remain relatively modest, as private demand recovers only slowly and fiscal policy support is withdrawn. The institution projects growth of 2½ percent in 2011 and 2¾ in 2012, with a slow decline in unemployment.
According to the IMF, the main policy challenge is to reach a political agreement on a fully-specified fiscal consolidation plan to ensure that the public debt-to-GDP ratio stabilizes by mid-decade and gradually falls afterwards. The adjustment should start in fiscal year 2012, but without putting an undue toll on the ongoing recovery.
However, much more needs to be done to address the medium-term fiscal imbalances. The IMF said that the specific fiscal consolidation measures presented by the administration so far do not stabilize the debt ratio under the IMF’s less optimistic growth and interest rate projections.
The overall fiscal effort will require both new revenues and cuts in mandatory spending programs which are the key drivers of long-term deficits. Options include the Social Security reform, savings in Medicare and Medicaid, reducing tax expenditures, and possibly introducing a national value-added tax and carbon taxes, the IMF said.
At the same time, persistently high unemployment and underemployment call for a re-examination of existing job-training programs. The education system could play a stronger role in retraining the unemployed. Further tax cuts attached to programs aimed at spurring hiring of long-term unemployed workers could also help.
The U.S. financial system continues to heal, but remains vulnerable. Bank capital has increased, but underlying profits are weak, and mortgage markets remain largely government dependent. Among the risks, heightened turmoil in European financial markets or the tail risk of a U.S. sovereign rating downgrade could impact U.S. financial institutions and markets.
Therefore, implementing the reform of financial regulation and supervision decisively is another priority. It will also be important to coordinate reforms internationally to promote a level playing field, the IMF said.
The key contributions that the U.S. can make to global growth and stability are: (i) raising domestic savings, particularly through fiscal consolidation, to help ensure that the current account deficit remains contained and to forestall potentially destabilizing increases in public debt; and (ii) strengthening its financial sector through enhanced regulation and supervision. The U.S. dollar depreciation over the past year would also contribute to global rebalancing, the IMF said.
The IMF has undertaken spillover analysis of the five largest economies in the world, and the United States—as part of its annual Article IV discussions with these countries. The analysis confirmed that the effects of U.S. policies on the rest of the world economy are uniquely large, mainly reflecting the pivotal role of U.S. markets in global asset price discovery.
Looking forward, a normalization of the monetary policy stance in the United States is likely to reverse some capital flows to emerging markets with open capital accounts by reducing interest rate differentials. This puts a premium on clear communication by the Fed regarding its future policy moves, the IMF said.
Furthermore, a credible and gradual U.S. fiscal consolidation would likely have limited negative short-term spillovers and substantial long-term benefits for the rest of the world. The costs associated with the tail risk of a loss of confidence in U.S. debt sustainability would be very large.
Finally, robust prudential supervision of U.S.-based (not necessarily U.S.-owned) investment banking activities can reduce risks that problems in dollar wholesale funding markets would precipitate another global banking shock, the IMF statement concluded.
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