IMF warns US about its 'fragile' economy

Barack Obama meeting US public
Image caption Barack Obama is locked in talks with Congress over raising America's $14.3 trillion debt limit

The International Monetary Fund has warned that the US debt burden is on an "unsustainable trajectory".

But the IMF said the US must avoid a sharp correction in order to protect its fragile economic recovery.

The IMF report forecast economic growth of 2.5% this year and 2.7% in 2012, which is below the Federal Reserve's own estimate of 3.3% next year.

"The [US] recovery has proceeded at a relatively slow pace... and has recently weakened," the IMF said.

The US budget deficit is projected to reach $1.4 trillion this year, above last year's $1.29 trillion gap and just below a record $1.41 trillion reached in 2009.

In its annual review of the US economy, the IMF urged Washington to reach a swift agreement on a deal to raise the government's borrowing limit.

'Significant consequences'

The Obama administration and Congress are locked in negotiations over making budget cuts before approval is given to raise the debt ceiling.

The US Treasury already has reached the existing $14.3 trillion legal limit on the nation's debt and needs to raise the debt ceiling by 2 August to avoid a default.

Failure to agree a debt limit deal would cause a "severe shock" to the economy, the IMF said, and could lead to a downgrade in the country's coveted AAA debt rating and send interest rates soaring.

"These risks would also have significant global repercussions, given the central role of US Treasury bonds in world financial markets," the IMF said.

President Barack Obama echoed these sentiments when he warned that: "If the United States government, for the first time, cannot pay its bills, if it defaults, then the consequences for the US economy will be significant and unpredictable".

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