IMF calls U.S. recovery tepid, warns of ‘fiscal cliff’ ahead

WASHINGTON -- Calling the U.S. recovery tepid, the International Monetary Fund warned that failure to halt the tax increases and big budget cuts set to hit next year could stifle the weak growth and damage “an already fragile world economy.”

Just as the Federal Reserve did last month, the IMF lowered its growth projections for the U.S. in its annual report on the nation’s economy and said Washington policymakers needed to be careful not to further choke the recovery by cutting back too much on spending.

The IMF said the U.S. economy would grow just 2% this year and annual growth would remain below 3% until 2015. The unemployment rate would hold at 8.2% this year and improve only slightly to 7.9% next year and to 7.5% in 2014.

Those forecasts are on the low end of the range projected in June by the Federal Reserve, which saw annual growth of 3% to 3.5% in 2014.

The financial strains in Europe have increased the risks to the U.S. economy, with the nation “vulnerable to contagion from an intensification of the euro area debt crisis,” the IMF said.

But uncertainty about Washington’s plans to address the nation’s fiscal problems also loom over the recovery. The so-called “fiscal cliff” at the end of the year -- the expiration of the George W. Bush-era tax breaks combined with deep automatic spending cuts -- would threaten the U.S. recovery.

If Congress and the White House don’t find a way to avoid the double-whammy of tax increases and spending cuts, annual growth could drop to well below 1% in 2013. The U.S. economy would actually contract early next year, causing “significant negative repercussions on an already fragile world economy,” the IMF said.

Adding to the uncertainty is the need for the U.S. to raise the national debt ceiling in early 2013. A standoff between congressional Republicans and the Obama administration over the debt ceiling last summer shook financial markets and caused Standard & Poor’s to lower the U.S. credit rating.

“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.

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