The U.S. economy has rebounded from a fourth-quarter slowdown and is poised for solid growth, but the country needs to do much more to correct its trade and budget deficits, the International Monetary Fund (IMF) said in a report Wednesday. After suffering a “temporary” slump in the final three months of 2005, the world's biggest economy is set for gross domestic product (GDP) growth of 3.4 percent this year, due to strong industrial output and high consumer confidence, the IMF said in its semi-annual World Economic Outlook. “Strong corporate profits and comfortable financing conditions imply a positive outlook for business investment,” the report said. “Further, a pickup in growth in [foreign] trading partners should mean that the external sector is less of a drag on growth, while in the near term, there is likely to be higher government spending associated with rebuilding in the aftermath of Hurricane Katrina.” For 2007, the IMF report predicted U.S. GDP would grow 3.3 percent, less than its previous forecast released in September of 3.6 percent. The greatest threats to the U.S. economy are a property-market slowdown, record-high oil prices, and the enormous current-account deficit, the report said. The current-account deficit—which includes the huge U.S. trade deficit as well as investment flows and foreign aid programs—reached 6.4 percent of GDP in 2005 and “makes the United States vulnerable to a swing in investor sentiment that could put downward pressure on the dollar and see a spike in long-run interest rates.” The deeper the United States sinks into debt, the more it relies on foreign investors to fund its deficits. “Even more importantly, against a background of low household saving and high energy prices, a weaker housing market could trigger a more abrupt withdrawal of consumer demand than anticipated,” the IMF said. The Untied States has enjoyed a boom in consumer spending in recent years as homeowners profit from rising real-estate prices to take out loans backed by the value of their homes. But the IMF said a property-market slump “could induce a more severe slowdown in consumption and overall GDP growth.” Given the strength of the U.S. economy, the Bush administration should be doing more to control the federal budget deficit, the IMF said. After narrowing in 2005, thanks to strong revenue growth, the deficit was forecast by the IMF to expand again to about 3 percent of GDP this year. The IMF dismissed President George W. Bush's plan to halve the deficit by 2009 as “unambitious” and “fraught with risks.”
