DUBAI, Sept 18 - The U.S. economy is set to move into a phase of faster growth in the second half of this year but the overvalued dollar and the ballooning fiscal deficit could knock the recovery off course, the IMF said on Thursday. The International Monetary Fund revised up its forecasts and predicted the U.S. economy would expand 2.6 percent this year and 3.9 percent next, up from April's forecasts of 2.2 percent and 3.6 percent. "The IMF staff continues to project a renewed recovery in the second half of 2003 and 2004, at a somewhat stronger pace than earlier expected, with GDP growth rising above potential from the third quarter onward," it said in its semi-annual World Economic Outlook report. The IMF growth predictions are in line with the outlook from private sector economists and put the world's largest economy in the number one growth slot among G7 for this year and next.
Fiscal and monetary stimulus and a pickup in forward looking economic data such as consumer and business sentiment all contributed to better growth expectations, the report said. The IMF said it is appropriate that the Federal Reserve had signalled that it planned to keep interest rates low for some time. However, the fund said the weakening of the dollar could help the recovery and "bring forward the time when a steady withdrawal of monetary stimulus becomes appropriate." The improved scenario had some clouds on the horizon. The IMF said the boost the housing boom had given to spending is unlikely to be sustained, the investment recovery may be held back because of excess slack in the economy and because of corporate caution still lingering from accounting scandals.
DOLLAR OVERVALUED
A correction in the U.S. current account and an accompanying disorderly fall in the dollar's value is another major risk to the outlook, the IMF said. "Despite its depreciation over the last year, the dollar still appears overvalued from a medium-term perspective, and the risk that its adjustment may become disorderly - or that it might overshoot - cannot be ruled out," the report said. The U.S. current account deficit, the broadest measure of the nation's trade with the rest of the world, held near a record in the second quarter, the government said on Monday. The gap narrowed marginally last quarter to $138.67 billion from an upwardly revised $138.71 billion in the first quarter.
The IMF noted that the make-up of the current account deficit, which used to be financed by equity flows, had shifted and was now funded primarily by sales of government agency and corporate paper, including to a number of Asian central banks.
SPENDING PROJECTIONS OPTIMISTIC
The ballooning fiscal deficit is also a cause for worry, the IMF said, calling the Bush Administration's budget forecasts "optimistic". The Bush Administration has ramped up spending to pay for tax cuts and the cost of the Iraq war, sending the budget back into deficits after the surpluses achieved under the previous administration. The government estimates an $87 billion spending plan for post-war Iraq announced earlier this month will increase the budget gap, already at a record, to at least $525 billion next year, or 4.7 percent of gross domestic product. The IMF said the boost in spending has provided some short-term support to the recovery but said "it has come at the cost of a substantial deterioration in the medium-term fiscal position... with the U.S. Administration's expenditure and revenue projections appearing relatively optimistic". If sustained, higher deficits will offset the longer-term benefits of the tax cuts, the IMF added, and urged the government to put in place measures to put Social Security and Medicare systems on a sound financial footing.//