US economy improving slowly, IMF says

Traders on Wall Street The IMF says soaring stock markets are helping support the US economic recovery

The underlying condition of the US economy is improving, according to the International Monetary Fund (IMF).

However, the IMF added that the recovery from recession has so far been "tepid".

In its regular assessment of the economy, the IMF said the US still faces "powerful headwinds".

But it noted gains on stock markets and in house prices, and predicted that economic growth should gradually accelerate over the next year.

The IMF said the expiration of the payroll tax cut earlier this year and the impact of government spending cuts (through the so-called sequester) were "weighing significantly on growth this year".

Analysis

The recession ended four years ago and the US economy can't really be described as back to normal. Why? Because the Federal Reserve is still spending $85bn a month on government debt and mortgage backed financial assets, and its main interest rate is close to zero.

Neither is compatible with normality. The IMF says the Fed's support for the recovery is still needed even though there are risks to financial stability associated with those unusual policies.

Still, there is no mistaking the sunnier tone in this report and the contrast with many other rich economies. The US is a lot further on the road back to economic health than many countries in Europe.

However, further ahead, the IMF sees a slightly brighter picture and expects "economic activity to accelerate to 2.7% next year as the fiscal drag subsides and the negative legacies of the financial crisis wane further".

On unemployment, the IMF predicted that the rate would remain broadly stable this year, "reflecting the pickup in the labour force participation as discouraged workers return to the labour force".

It also expects the rate of unemployment to gradually fall in 2014.

Gradual acceleration

The Federal Reserve's policy of keeping interest rates very low (close to zero) was also seen by the IMF as still being necessary to support the recovery.

Overall, the IMF felt that the improvement in the underlying conditions of the US economy "bodes well for a gradual acceleration of growth".

The IMF's assessment is in stark contrast to one it released early this week on the eurozone, in which it concluded that the economies in several member countries remained weak.

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