United States: Extreme conditions
The US economy is facing extremely difficult conditions. The financial crisis has intensified at a time when growth had already been weakened by the prolonged housing downturn. A credit crunch is likely to result in a pronounced contraction in activity over the near term and a further deterioration of the labour market.
Once financial conditions normalise, GDP growth should resume but at a slower pace than in past recoveries, in part because of negative wealth effects. In response to lower commodity prices and the opening of a large output gap–that is, a shortfall between actual and potential output–inflation should recede significantly to around 1.5% in 2010.An additional fiscal stimulus package might become desirable in the near term if financial conditions do not quickly improve. Once the crisis has passed, the focus should shift to restoring fiscal sustainability by reducing the budget deficit and tackling the challenge of rising entitlement spending. The unfolding events since mid-2007 have highlighted the need for a major overhaul of financial regulation and supervision, a process which should be started soon to boost investor confidence and thus help to revive the economy.