Growth of U.S. economy will remain tepid through 2013, before accelerating in 2014, said the International Monetary Fund (IMF) on Friday.
The IMF' s annual report on U.S. economy forecast growth of 1.7 percent this year and 2.7 next year, both down 0.2 percentage point from the organization's April projections.
The IMF said the U.S. economic recovery remains modest but is gaining ground, supported by a rebound in the housing market, still easy financial conditions, and a boost to household net worth from higher house and stock prices.
"These factors are helping to offset the impact of strong fiscal adjustment on consumer spending. But the economy is still far from normal conditions, with high unemployment and a large negative output gap."
"Fiscal policy will be a significant drag on growth in 2013, but less so in 2014," the report predicted, and said the monetary policy will remain accommodative as the U.S. Federal Reserve' s bond purchase program may continue at the current pace through late this year, and then be scaled back gradually over the course of 2014.
"Risks to the outlook are still tilted to the downside, although less so than last year," said the IMF, noting the drag from fiscal policy could turn out to be greater than expected and a worsening of the euro area debt crisis would weigh on U.S. growth.
While believing the Federal Reserve has a range of tools to manage the normalization of monetary policy, the IMF cautioned that initial steps taken by the U.S. central bank could result in an abrupt increase in the longer-term interest rates, should investors rush to offload their Treasury holdings to avoid greater capital losses down the road. The increase in market turbulence since late May is illustrative in this regard.
The IMF stressed the fiscal consolidation should be more balanced and gradual. The automatic spending cuts, known as sequester, not only reduce growth in the short term but could also undermine potential in the medium term through indiscriminate cuts to education and infrastructure. "They should be replaced with back-loaded entitlement savings and new revenues."