Washington - The International Monetary Fund on Tuesday lowered its estimates for U.S. economic growth for this year and next, and urged policy makers to do more to help the housing sector and support the tepid recovery.
In its annual assessment of the U.S. economy, the fund also had a sharp warning for Washington: Avoid the fiscal cliff at the end of the year, when the Bush-era tax cuts expire and mandatory spending cuts across the government come into effect. The sudden shock could be enough to put the country back into recession, the fund warned, with global repercussions.
In a news conference here, Christine Lagarde, the fund's managing director, also said that Congress should "promptly" raise the debt ceiling to avoid spooking the global debt markets and raising the country's borrowing costs. The government is expected to hit its statutory borrowing limit late in 2012.
Should policy makers fail to lessen the end-of-the-year fiscal blow and raise the debt ceiling, "the domestic effects would be severe, with negative spillovers to the rest of the world," warned Lagarde.
The fund cut its estimates of U.S. growth to 2 percent in 2012 and 2.3 percent in 2013 in the report. In April, it had estimated growth of 2.1 percent in 2012 and 2.4 percent in 2013.
The fund cited numerous reasons for the slowdown. The need for households to pay down their debts has cut into consumer spending and reduced economic demand. Job creation has slowed this year, and the unemployment rate remains seriously elevated. The long-simmering debt crisis in Europe and slowdown in big emerging markets have cut into exports.
"Business fixed investment also seems to have lost some momentum, despite favorable financial conditions for the cash-rich corporate sector," wrote the fund's analysts. "Large firms can tap bond markets at low rates and enjoy easy access to bank credit. In contrast, access to mortgage credit is still tight for households, notwithstanding historically low rates."
The fund applauded recent efforts to support the housing market. But it said that Washington should do more. Specifically, it said that the government should support broader refinancing, and that Fannie Mae and Freddie Mac - the government-sponsored mortgage finance giants - should allow principal reduction.
The IMF also warned of risks to U.S. economic growth. Most notably, an intensification of the eurozone crisis could hit the United States by causing investors to flee to safe assets and sapping exports, said Lagarde.
The fund also advised the United States to reduce its significant debts in the medium term, calling a "credible" fiscal plan "urgently needed" to avoid scaring global investors and damaging the recovery.