US risks tepid recovery turning into recession, IMF warns

Tuesday, July 3, 2012
By Paul Martin

America’s politicians risk turning a tepid recovery into a recession next year if they fail to reach agreement on how quickly to cut the US deficit, the International Monetary Fund has warned.

By Richard Blackden
TelegraphUK
03 Jul 2012

The fund added its voice to a rising chorus of concern that sharp political divides in Washington mean that the world’s biggest economy will fall off what has dubbed a “fiscal cliff” in less than six months time.

As it stands, the expiration of George W Bush’s tax cuts on December 31, and the start of more than $1 trillion in spending cuts in January, mean the US is facing a severe fiscal headwind just as growth is slowing.

Fears are increasing in the US and beyond that Republicans and Democrats will fail to reach agreement over how to temper the pace of the deficit reduction in 2013, alongside delivering a long-term plan on the country’s $15 trillion of debt.

“It is critical to remove the uncertainty created by the “fiscal cliff” as well as promptly raise the debt ceiling, pursuing a pace of deficit reduction that does not sap the economic recovery,” the IMF said in its annual survey of the US.

Economists at Bank of America have estimated that the fiscal tightening would amount to almost 4pc of the country’s gross domestic product – greater than what the UK government is trying to achieve.

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