MercoPress. South Atlantic News Agency

US economy forecasted to undergo mid cycle pause

IMF Director Rodrigo Rato

IMF Managing Director Rodrigo Rato forecasted that the world economy faces another solid year of growth in 2007, estimated in 5%, and underlined the fact that the world is less dependent on the United States economy.

Mr Rato said the US economy is expected to slow down given the weakness of the housing and mortgage market plus a drop in investment, but should begin picking up towards the end of the year and in 2008. The world's largest economy is slowing, but so far the downturn appears to be a "mid-cycle pause" rather than a full-blown recession confirmed the IMF World Economic Outlook report. Economists at the Fund forecasted the US economy would grow about 2.2% this year, almost a quarter slower than the 2.9% predicted last October. But despite the lowered forecast, "a growth pause still seems more likely at this stage than a recession". While economic growth has been slowing, the IMF sees it picking up in the latter half of the year, and increasing to 2.8 pct growth next year. The IMF said the continued weakness in the US housing sector is a driving force behind the lowered output expectations. "With the stock of new homes rising to its highest level in over 15 years, home construction is falling more sharply than previously expected as homebuilders move to reduce their existing inventory," the IMF said A major question for economic policymakers relates to the turmoil regarding high risk mortgages or subprime lending in the US housing sector. "The deterioration in credit quality in the subprime mortgage market could spread to other market segments in a weaker housing environment, adversely affecting the financial sector and credit availability," the IMF said, although the economic fallout has raised some risks, it is "not likely to spread to the rest of the globe". On inflation, the IMF said pressures are likely to moderate over the course of the year, and consumer prices are seen rising 1.9% in 2007. "Risks that inflation may be more persistent cannot be entirely discounted," the IMF said, adding that it expects consumer prices to rise 2.5% in 2008. IMF praised the US Central Bank (Federal Reserve) decision to keep all options on the table for its next interest rate move. US unemployment rate is expected to creep up to 4.8% this year and 5% in 2008