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IMF Warns US to Turn Away From 'Fiscal Cliff' Austerity

Oct. 8, 2012
empty pockets

The International Monetary Fund insisted Tuesday (local time) that US lawmakers head off automatic austerity measures before the end of 2012.

In its World Economic Outlook released Tuesday in Tokyo, the IMF projected the US economy to grow at about 2 per cent in 2012-13. But tax increases and spending cuts in current law constitute a "major US domestic risk" to the economy.

Without changes by Congress - not expected until after the November 6 elections - those measures will reduce the trillion-dollar US budget deficit by 4 percentage points of gross domestic product. Such a sudden fiscal adjustment could choke off US economic growth that "compared with earlier recoveries ... remains sluggish," the IMF said.

The fund forecasts a 1-percentage-point cut in the US deficit, through adjustments to ease the looming austerity measures, nicknamed the "fiscal cliff." The US government estimates are that the economy would lurch into recession if current law goes unchanged.

That scenario "would inflict large spillovers on major US trading partners," the IMF said.

US unemployment in September edged down to 7.8 per cent, a four-year low, but the data came too late for the IMF report. Last month's final estimate of second-quarter growth put the April-June expansion at an annual rate of 1.3 per cent.

The Washington-based crisis lender said the US continues in a "modest recovery with weak job creation ... amid a weak global environment." It said the residential real estate market is showing signs of stabilizing.

The "large downside risks" to the US economy include the possibility of a further escalation of the eurozone's debt crisis, which is the main foreign risk.

"The urgent policy priorities in the United States are to avoid excessive fiscal contraction in the short term, promptly raise the debt ceiling, and agree on a credible fiscal consolidation plan - centred around entitlement and tax reforms - that places government debt on a sustainable path in the medium term," the IMF said.

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Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH

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