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IMF Says It Will Lower U.S. Outlook Because of Sequestration

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Feb. 28 (Bloomberg) -- The International Monetary Fund will lower its growth forecasts for the U.S. this year because of the $85 billion in spending cuts set to begin tomorrow, an IMF spokesman said.

“Sequestration in the U.S. is one of the key issues of the moment,” spokesman William Murray told reporters in Washington today. “What it means is we’ll have to reevaluate our growth forecasts in the U.S. and also our other forecasts.”

Murray said the IMF, which currently forecasts 2 percent growth for the U.S. this year, expects a negative impact of at least 0.5 percentage point if all the cuts go into effect. He said the spending reductions will also hurt global growth as a decline in demand from the world’s largest economy hits its trade partners. The new forecasts will be released next month in the World Economic Outlook report.

For all the concern in Washington about the cuts, investors are signaling that the economy is strong enough to weather any reductions in spending, with home sales, consumer confidence and employment rebounding.

The Standard & Poor’s 500 Index has climbed 6.5 percent this year. Yields on 10-year Treasuries have dropped 10 basis points since Jan. 31, and were at 1.89 percent at 11:51 a.m. New York time. The Standard & Poor’s 500 Index was up 0.2 percent at 1,518.68.

President Obama

President Barack Obama summoned congressional leaders to a meeting at the White House tomorrow, with parties far apart on how to replace the cuts totaling $1.2 trillion over nine years, with $85 billion in the remaining seven months of this fiscal year.

Murray also said the IMF has received new fiscal projections from Egypt, which is seeking to secure a $4.8 billion loan from the fund. The fund is analyzing the forecasts and will discuss with authorities on the next steps to take, he said.

He declined to comment directly on Italy’s inconclusive elections, which have fueled concern about the outlook for the euro region, and the country’s deepening recession.

Instead, he said Italy should maintain recent progress it’s made on fiscal policies and make sure budget consolidation comes after a thorough review of spending and includes taxes. It must also accelerate an overhaul of the labor and product markets, he said.

“Growth and employment in Europe is weak,” Murray said. “Getting the pace of fiscal consolidation right is of the essence.”

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

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