The US will shrug off Hurricane Katrina's immediate impact but faces longer-run risks arising from high oil prices, messy public finances and a housing downturn, the IMF said today.
The International Monetary Fund, in its semiannual World Economic Outlook, predicted the world's biggest economy would expand by 3.5% this year and 3.3% next.
The projections are a touch down on the IMF's last report in April, but show the US economy still to be the industrial world's economic motor when compared with flagging growth rates in Europe and a hesitant recovery in Japan.
Economic data 'generally suggest the momentum of the expansion remains solid,' the latest IMF review said. 'However, the near-term outlook has been overshadowed by the devastating loss of life and property caused by Hurricane Katrina,' it added.
Katrina knocked out a large chunk of US oil drilling and refining capacity, sending petrol prices shooting up. That surge, the IMF said, could create 'larger indirect effects on consumption and fixed investment.'
Like other major economies, the US is vulnerable to the effects of record-high oil prices, the IMF report said. But unlike Europe and Japan, its current-account deficit has exploded on insatiable demand for imports. The deficit has been sustained by an equally insatiable demand for US assets such as government bonds on the part of foreign creditors, notably the Chinese and Japanese governments.
But the IMF said the deficit now risks becoming an 'increasing headwind, with rising debt and higher interest rates likely to reduce the US net income balance by about 1% of GDP in coming years.'
The Fund said it feared Katrina's indirect impact on consumers could prove worrisome, especially if it leads to a downturn on the red-hot US property market, which has done much to fuel consumer spending.
'While house price booms do not necessarily end in busts, recent house price increases have raised concerns that the market could be increasingly susceptible to a correction,' the report warned. Federal Reserve chairman Alan Greenspan has already made clear his anxiety about 'froth' in regions of the US housing market, especially given that buyers are now resorting to riskier mortgages to get a foot on the property ladder.
The IMF also said that given a low savings rate, a large current account deficit and the impending retirement of the 'baby boomer' generation, the US government needs to do more to get its budget in order.
