IMF lowers U.S. 2007 growth estimate, sees risks

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SINGAPORE, Sep 14 (Reuters) The U.S. economy will grow slower than previously anticipated in 2007 as the housing market slows, while more interest rate rises may be needed to keep inflation expectations at bay, the International Monetary Fund said on Thursday.

In its World Economic Outlook, the IMF forecast the U.S. economy would grow 2.9 percent in 2007, down 0.4 percentage points from a 3.3 percent forecast made in April. The 2006 growth forecast was left unchanged at 3.4 percent.

The IMF said it had lowered its U.S. growth forecast for next year on expectations that consumption and residential investment growth would slow further as the housing market weakens, although strong profits should help business investment rebound.

''Risks, however, are slanted to the downside,'' the IMF said, adding that the housing market, which now looks overvalued, was the most likely source of short term risks to the economy.

''A further cooling of the market would dampen residential investment and consumption, including through a decline in confidence, a drop in home equity withdrawal, and lower employment in the real estate and related sectors,'' the IMF said.

''The impact of slowing house price appreciation on consumption would be reinforced by a further decline in equity prices or an increase in gasoline prices.'' The IMF said that despite a slowing in economic growth, inflation pressures have started to pick up because excess capacity in product and labour markets had fallen while a rise in energy prices had begun to feed through into some other prices.

The Federal Reserve in August held the federal funds rate steady at 5.25 percent, pausing its string of increases that started in mid-2004 when the benchmark rate was at 1 percent.

''The future path of the monetary policy stance is now dependent on what incoming data suggest about the balance of the competing risks to growth and inflation,'' the IMF said.

''Nevertheless, given the importance of keeping inflation expectations firmly in check, some further policy tightening may still be needed.'' The IMF said there will be a premium on the Fed clearly communicating its policy intentions and that ''a more explicit statement'' of the medium-term inflation objective may be helpful.

It said that with the current account deficit expected to reach almost 7 percent of GDP this year, boosting national savings would be a key part of a multilateral strategy to reduce global imbalances.

Data on Tuesday showed the U.S. trade deficit widened sharply in July to a record billion.

The U.S. government expects to achieve its goal of halving the federal deficit by the 2008 financial year, a year ahead of schedule, and although recent fiscal performance has been better than expected, more needs to be done, the IMF said.

A more ambitious path for reducing the deficit would help provide a firmer basis for the economy to deal with demographic pressures, put the budget in a stronger position in the event of an economic downturn and help reduce global imbalances, it said.

The IMF said a slowing housing market would lead to some increase in private savings. The introduction of health savings accounts should raise incentives for household savings and recently passed pension legislation will help in this, it added.

The IMF said moving to a tax system with a greater reliance on a consumption tax rather than taxes on income would encourage saving, and greater transparency about likely future shortfalls in the social security system and in private pension plans may increase awareness of the need for higher savings for retirement.

For stories on IMF forecasts by region, click on, for a table of the forecasts for main economies click on.

REUTERS VJ KP0828

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