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WASHINGTON / IMF ON USA ECONOMY
STORY: WASHINGTON / IMF ON USA ECONOMY
TRT: 2.36
SOURCE: IMF
RESSTRICITONS: NONE
LANGUAGE: ENGLISH / NATS
DATELINE: 14 JUNE 2013, WASHINGTON, DC
1. Wide shot, press conference
2. Wide shot, principals walk on stage
3. SOUNDBITE (English) Christine Lagarde, Managing Director, International Monetary Fund:
“The recovery in the United States of America is gaining ground and becoming more durable. The housing market, the household balance sheets and the labour market are generally doing better. The private sector is leading. Easy financial conditions have helped. However, the economy has a way to go before it returns to full strength.”
4. Med shot, reporters
5. SOUNDBITE (English) Christine Lagarde, Managing Director, International Monetary Fund:
“The sequester and other deficit-reduction measures, for example, could have a stronger-than-expected impact. That’s a potential risk. Another fiscal worry is doing too little further down the road after doing too much this year.”
6. Med shot, reporters
7. SOUNDBITE (English) Christine Lagarde, Managing Director, International Monetary Fund:
“Unwinding monetary policy accommodation is likely to present challenges, including for financial stability. So this needs to be managed carefully. In our assessment, there is no need to rush to exit from monetary accommodation, given the still-large output gap, given the subdued growth that we have, and given the well-anchored inflation expectations.”
8. Med shot, reporters
9. SOUNDBITE (English) Christine Lagarde, Managing Director, International Monetary Fund:
“We are seeing clearly that communication will be key in order to monitor expectations and in order to reduce uncertainty and this will be seen in the weeks and months to come.”
10. Med shot, reporters
11. SOUNDBITE (English) Christine Lagarde, Managing Director, International Monetary Fund:
“The troika relationship has been of a very unusual and exceptional nature, just as the crisis has been. But it has been of solid cooperation, constant cooperation. I will tell you something. I think not a week goes by without Olli Rehn and myself speaking on the telephone sending each other messages, texts, whatever, so I am very happy with the cooperation.”
12. Wide shot, panel
The United States could spur growth by adopting a more balanced and gradual pace of cutting the deficit, especially at a time when monetary policy has limited room to support the recovery further, the International Monetary Fund said after wrapping up its annual review of the world’s largest economy.
Managing Director Christine Lagarde said “the recovery in the United States of America is gaining ground and becoming more durable. The housing market, the household balance sheets and the labour market are generally doing better. The private sector is leading. Easy financial conditions have helped. However, the economy has a way to go before it returns to full strength.”
Despite some improvements in economic indicators, particularly in the housing market, the very rapid pace of deficit reduction (including automatic spending cuts known as the sequester) is slowing growth significantly, the IMF said.
U.S growth is expected to slow to 1.9 percent in 2013, from 2.2 percent in 2012. This projection reflects the impact of the sequester, and the expiration of the payroll tax cut and the increase in tax rates for high-income taxpayers.
Growth could pick up to 2.7 percent next year with a more moderate fiscal adjustment and a further strengthening of the housing market, the IMF said.
According to the IMF, the main policy challenge is to support the recovery, while addressing the vulnerabilities that threaten growth, public finances, and financial stability in the medium term.
In its assessment, the IMF emphasized a fiscal policy strategy to deal with this challenge, including the need to:
The spending cuts not only reduce growth in the short term, but the arbitrary reductions in education, science, and infrastructure spending could also reduce medium-term potential growth.
Lagarde said “the sequester and other deficit-reduction measures, for example, could have a stronger-than-expected impact. That’s a potential risk. Another fiscal worry is doing too little further down the road after doing too much this year.”
Spending on major health care programs and Social Security is expected to increase by 2 percentage points of GDP over the next decade. Interest outlays are also projected to increase by 2 percentage points of GDP over the same period, as interest rates gradually return to normal levels. These factors would again widen the budget deficit and increase public debt. New revenues could be raised through a reduction in tax exemptions and deductions, as well as though the introduction of a carbon tax and a value added tax. Spending measures would need to curb the growth in public health care and pension outlays.
The IMF also stressed the crucial importance of monetary policy.
Lagarde said “unwinding monetary policy accommodation is likely to present challenges, including for financial stability. So this needs to be managed carefully. In our assessment, there is no need to rush to exit from monetary accommodation, given the still-large output gap, given the subdued growth that we have, and given the well-anchored inflation expectations.”
But the IMF underscored the need to plan and manage a gradual and orderly normalization of monetary policy conditions, while monitoring financial stability risks.
While the U.S. Federal Reserve has a range of tools to help manage the exit, effective communication on the exit strategy and careful timing will be critical to avoid excessive volatility in long-term interest rates as the exit nears.
Lagarde said “we are seeing clearly that communication will be key in order to monitor expectations and in order to reduce uncertainty and this will be seen in the weeks and months to come.”
Despite the improvements over the past 12 months, there is still room for policies to support the housing market, the IMF said. As a stronger housing market remains an essential component of the U.S. economic recovery, it would be important to maintain the government-backed programs that facilitated refinancing and modification of loans under stress.
The IMF also noted that there is room for active labour policies to complement efforts to boost domestic demand and to help reduce the risk of enduring losses of human capital. These policies can include training and support for job search, as well as efforts to strengthen the link between the education system—particularly community colleges—and employers, including through apprenticeships.
A final report will be issued once it has been discussed by the IMF’s 24-member Executive Board in late July.
On a side note, when asked about the IMF’s relationship with the Troika, she said that she is happy with the cooperation.
Lagarde said “the troika relationship has been of a very unusual and exceptional nature, just as the crisis has been. But it has been of solid cooperation, constant cooperation. I will tell you something. I think not a week goes by without Olli Rehn and myself speaking on the telephone sending each other messages, texts, whatever, so I am very happy with the cooperation.”
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