IMF: U.S. Unemployment Will Stay Above 9 Percent through 2011

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Thursday, July 08, 2010 at 12:41 pm

Yesterday, the International Monetary Fund released a report on the world economy, revising upward its predictions for U.S. economic growth while lowering its projections for many Western European countries. It also cautioned that the global recovery is imperiled due to the sovereign debt crises in Europe:

Downside risks have risen sharply. In the near term, the main risk is an escalation of financial stress and contagion, prompted by rising concern over sovereign risk. This could lead to additional increases in funding costs and weaker bank balance sheets and hence to tighter lending conditions, declining business and consumer confidence, and abrupt changes in relative exchange rates. Given trade and financial linkages, the ultimate effect could be substantially lower global demand.

In a separate report from late June, released today, the IMF said it does not expect the U.S. economy to fall into a double-dip recession, but that unemployment will stay above 9 percent throughout 2011. That translates into a long, slow recovery characterized by persistent joblessness and sluggish growth in GDP and consumer spending: “The outlook has improved in tandem with the recovery, but remaining household and financial balance sheet weaknesses — along with elevated unemployment — are likely to continue to restrain private spending.”

But the biggest risk to the U.S. recovery? Housing:

[The] backlog of foreclosures and high levels of negative equity, combined with elevated unemployment, pose risks of a double dip in housing; the continued deterioration in commercial real estate poses risks for smaller banks; and financing conditions remain tight, especially for smaller firms reliant on bank finance.

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