IMF Lowers U.S. GDP Forecast to 2%

BLOOMBERG — The U.S. economy will grow by 2% this year and about 2.25 percent in 2013 amid a “tepid” recovery and the European debt crisis, the International Monetary Fund said, lowering its previous projections.

The U.S. remains “subject to elevated downside risks, in light of financial strains in the euro area and uncertainty over domestic fiscal plans,” the IMF said in a statement released Tuesday (July 3). In an April report, the IMF forecast U.S. growth of 2.1% this year and 2.4% in 2013.

“Further easing” by the Federal Reserve might be needed “if the situation was to deteriorate,” IMF Managing Director Christine Lagarde said at a press conference in Washington.

She said she welcomed previous actions by the Fed to help the U.S. economy, including the expansion of the so-called Operation Twist that replaces short-term Treasuries in the Fed’s portfolio with longer-term debt to lengthen the average maturity of its holdings.

Lagarde said the “downside risks” include the euro crisis and the “fiscal cliff” of expiring tax cuts and mandatory spending reductions that will take effect at the end of the year unless Congress acts.

She said the risk of U.S. lawmakers not reaching an agreement on the federal debt ceiling “is also a clear potential for financial market disruption.” Treasury Secretary Timothy Geithner has said the executive branch has “tools” that can push back raising the debt limit until early 2013.

Lagarde said debt is the “big problem” for the U.S.

“No country can go on with heavy and growing debt,” Lagarde said. “In order to bring the debt under control, action needs to be taken over a period of time. That is not just next year, that is going to extend for the next 10 years. And it needs to be gradual, not so contractionary that the economy stalls.”

The U.S. economy expanded at a 1.9% pace in the first quarter, the same as previously estimated, and slower than the 3% pace in the prior three months, revised data showed last week.

To combat flagging growth, Fed policy makers said they are ready to take more steps should the U.S. expansion slacken. Fed officials said in a policy statement June 20 that they expect “economic growth to remain moderate over coming quarters and then to pick up very gradually.”