US soft landing scenario likely amid risks: IMF

The US economy is likely to rebound amid ebbing inflation as consumer and business spending overcome the drag from a stumbling housing market, the International Monetary Fund said on Friday.
"The most likely scenario is a soft landing as growth recovers and inflation falls," the IMF said in a statement summarising staff views after a review of the US economy.
However, economic growth is "uncomfortably close" to the 2 percent stall speed associated with past recessions, the IMF said. In addition, cost pressures from rising prices for energy and food could spur inflation, particularly if the productivity of US workers does not pick up, the world financial body said.
But IMF officials said resilient consumer spending, revived business investment and increased export opportunities provided by strong global growth should support more US output.
The fund said the economy should expand 2 percent this year and 2.75 percent in 2008, with core inflation - which excludes food and energy prices - falling below 2 percent.
The US economy grew at a sluggish 0.6 percent rate in the first three months of 2007, but government and private sector economists expect growth to accelerate through the remainder of the year. Recent economic data have supported that view with evidence of strong job growth, expansion in the services sector, and booming retail sales.
IMF officials said the Federal Reserve's current policy stance, with a target for benchmark interest rates likely to remain at 5.25 percent for the next several months, is right for current conditions.
"While a deterioration in conditions would require a speedy response, we agree it's sensible now to remain focused on avoiding a damaging increase in inflationary expectations," IMF First Deputy Managing Director John Lipsky said at a press briefing.
"As one of our interlocutors put it, 'expansions are kept alive by keeping inflation in check,'" Lipsky said, noting that the fund consulted with the Treasury Department, the Fed and other agencies while conducting its review.
Fed officials have steadily highlighted as their predominant concern the possibility that core inflation may not moderate. The US central bank says a period of sluggish economic growth should wring price pressures from the economy and that inflation should recede as growth picks up.
Recent price data has been in line with that scenario, although a recent sharp rise in gasoline and food prices has led to worries inflation risks are not yet fully contained.
The results of the annual review, known as an Article IV consultation, will be discussed with the IMF board July 20. Lipsky said US current account deficits of around 6 percent of GDP in the foreseeable future are not an immediate cause for concern. At the same time, a sudden shedding of dollar assets by international investors could cause global financial disruptions, he said.
"The IMF has emphasised pre-emptive action by the major players in the world economy to reduce the size of deficits and surpluses on each side," he said. Meanwhile, the IMF congratulated the United States on reducing its budget deficit faster than expected. Recent budget reports show the government on track to significantly reduce the 2007 fiscal year deficit from the $248 billion reported for fiscal 2006.