The United States could spur growth by adopting a more balanced and gradual pace of fiscal consolidation, 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.
“There are signs that the U.S. recovery is gaining ground and becoming more durable. However, it has a way to go before returning to full strength. The IMF’s advice is to slow down, but hurry up: meaning slow the fiscal adjustment this year—which would help sustain growth and job creation—but hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability,” managing director Christine Lagarde said.
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% in 2013, from 2.2% 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% next year with a more moderate fiscal adjustment and a further strengthening of the housing market, the IMF said.
To read the full IMF report click here.