IMF: US must raise debt limit to avoid economic shock

Jun 29, 2011, 18:57 GMT

Washington - The International Monetary Fund Wednesday downgraded its expectations for the US economy, while urging Washington to quickly move to raise its debt limit.

The IMF also warned the US government against a too-rapid deficit reduction, which it said would put slow economic recovery at further risk.

The IMF said the US economy would likely grow only 2.5 per cent in 2011, 0.3 percentage points less than April projections. For 2012, US growth would likely be 2.75 per cent, 0.2 percentage points less than previously forcast.

'The federal debt ceiling should be raised expeditiously to avoid a severe shock to the economy and world financial markets,' the IMF said in one of its periodic reports on the US economy.

The US reached its congressionally-mandated borrowing limit of 14.3 trillion dollars in May. The Republican-controlled House of Representatives refused to raise the limit in order to press for more spending cuts. Democrats meanwhile want to end Bush-era tax cuts to the wealthy, but face strong Republican resistance to the proposal.

In the interim, the Treasury Department is deploying stop-gap measures that will run out on August 2.

US President Barack Obama warned Wednesday that the warning light was flashing before the August 2 target, which he said was a 'hard deadline.'

'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,' Obama said. 'We don't know how capital markets will react.'

The IMF questioned the intention of the US government to reduce its deficit from 11 per cent of gross domestic product to 4.6 per cent by 2013, saying it appeared to be too ambitious.

Instead, Washington should spread the reductions over a longer period of time so as not to endanger the limping economic recovery.

The IMF noted the continuing decline in home prices and the high unemployment in the US, which have restrained consumer spending that makes up 70 per cent of the US economy.

On the brighter side, the IMF noted that the US export market had made a comeback, which improved the financial markets.

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