IMF Cuts 2011 U.S. Growth Forecast on Oil, ‘Lackluster’ Pace of Job Gains

The International Monetary Fund lowered its forecast for U.S. growth this year, predicting higher oil prices and the pace of job gains will restrain the recovery.

The world’s largest economy will expand 2.8 percent this year, down from the 3 percent projected in January, the IMF said today, citing the need to reduce deficits and boost exports. Global gross domestic product will grow 4.4 percent in 2011, matching the previous estimate, according to the Washington- based lender’s World Economic Outlook report.

Consumer spending, the biggest part of the U.S. economy, faces headwinds from the rising cost of food and gasoline. Federal Reserve officials last month said the expansion is on “firmer footing,” lessening the need to extend a bond purchase program beyond June.

“If the U.S. is going to do fiscal consolidation of the size that it has to do, then demand has to come from elsewhere,” Olivier Blanchard, chief economist at the IMF, said today at a news conference. “It has to come from net exports. This just has to happen for the U.S. to be able to sustain growth.”

The economy grew 2.9 percent last year, the most since 2005, according to figures from the Commerce Department. U.S. GDP will expand 2.9 percent this year and 3.1 percent in 2012, according to the median estimate of about 70 economists surveyed by Bloomberg News from April 1 to April 7.

‘Pause that Refreshes’

“This may just be a pause that refreshes in the overall expansion,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in an interview on April 8. “The primary risk to the forecast is oil, front and center.”

Oil for May delivery fell 69 cents, or 0.6 percent, to $112.10 a barrel at 10:50 a.m. on the New York Mercantile Exchange. Futures settled at $112.79 a barrel on April 8, the highest closing price since Sept. 22, 2008. Prices have risen 32 percent in the past year.

“Recovery in the labor market remains lackluster,” the IMF said in the report. “The drag on 2011 growth from oil price increases largely offsets the boost from the Federal Reserve’s unconventional policies and from stronger net exports.”

The jobless rate in the U.S. will average 8.5 percent this year and 7.8 percent in 2012, the IMF said in the report. Unemployment was 8.8 percent in March, according to U.S. Labor Department data.

Job creation has recently accelerated, but the pace of improvement in the labor market remains disappointing considering the size of the job losses during the decline,” the fund said in the report.

Several Risks

The IMF also highlighted several risks to the recovery, including a spike in oil and commodity prices that “could dampen confidence and weaken consumer spending.” The housing market, which precipitated the recession that began in December 2007 and ended in June 2009, may see home prices decline further, according to the report.

The Fed, after its latest policy meeting March 15, pledged to continue its program of purchasing $600 billion of bonds through June, in order to “promote a stronger pace of economic recovery.” Fed officials also said a rise in commodity prices signaled the deflation risk had diminished and they were unlikely to expand the bond purchase plan.

Living Cost

Consumer prices will climb 2.2 percent this year and 1.6 percent in 2012, according to the IMF report. The cost of living in the U.S. increased 2.1 percent in the 12 months ended February, according to the Labor Department in Washington.

The fund also called for the U.S. to tackle its growing deficit. “A credible strategy to stabilize public debt in the medium term, and a down payment on fiscal consolidation in 2011, are urgently needed,” the IMF said in the report.

Signs of improvement in the economy, according to the IMF report, consist of business investment in durable goods, manufactured items meant to last at least three years, and “healthy corporate balance sheets,” putting companies in a position to “support stronger hiring.”

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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