U.S. must avoid fiscal cliff, Canada quell housing boom-IMF

* US, Canada growth both seen around 2 pct in 2012, 2013

* US failure to avoid fiscal cliff would sap GDP

* US must do more to ease housing foreclosure crisis

By Alister Bull

WASHINGTON, Oct 8 (Reuters) - The United States willcontinue to notch modest growth of around 2 percent growth thisyear and next but must avoid a year-end 'fiscal cliff' of taxhikes and spending cuts that would tip it back into recession,the IMF said on Monday.

In a semi-annual checkup on the health of the world economy,the International Monetary Fund also said Canada would grow byroughly the same rate as its southern neighbor, and must takecare to ensure that its housing boom does not turn into a bust.

A resumption of the euro zone debt crisis is a risk for bothcountries but would be a harder hit on the United States, amajor European trading partner, dampening demand for U.S. goodsand pushing up the dollar to make U.S. exports more expensive.

However, the crucial threat to the continued recovery of theU.S. economy is home grown, the IMF said in its October WorldEconomic Outlook.

"In the United States, it is imperative to avoid excessivefiscal consolidation (the fiscal cliff) in 2013, to raise thedebt ceiling promptly, and to agree on a credible medium-termfiscal consolidation plan," it urged. The IMF calculated thefull impact of the tax hikes and spending cuts would withdrawmore than 4 percent from U.S. gross domestic product in 2013.

Tax cuts approved during the administration of formerPresident George W. Bush are set to expire at the end of thisyear, and deep automatic reductions to government spending arescheduled to start kicking in, unless Congress agrees to amassive debt and deficit reduction deal.

No hope is given for a compromise before the Nov. 6 generalelection between President Barack Obama's Democrats, who holdsway in the Senate, and their Republican foes, who currentlycontrol the U.S. House of Representatives. But failure to do adeal would have dramatic negative consequences.

"Growth would stall in 2013 with the full materialization ofthe cliff and ... would inflict large spillovers on major U.S.trading partners and also on commodity exporters (because ofdeclines in commodity prices)," the IMF said.

The lackluster U.S. economic performance is a "legacy" ofthe collapse of the country's housing market and ensuingrecession between 2007 and 2009, the IMF said, echoing a claimObama makes frequently as he campaigns against his Republicanpresidential challenger Mitt Romney.

But the IMF also pointed out that official policies havefailed to sufficiently tackle the challenge posed by the heavyoverhang of foreclosed properties.

"In the housing market, more must be done to reduce the rateof foreclosures and remove impediments to the transmission oflow long-term policy rates to mortgage rates," the Fund said.


With U.S. politicians locked in a bitter election campaign,in which the White House, all the seats in the House and onethird of those in the Senate are up for grabs, there has beenlittle likelihood of fiscal policy action to spur growth.

The Federal Reserve, however, did decide to act, announcinga third round of so-called quantitative easing in September,under which is promised to buy $40 billion of mortgage backedbonds every month until labor market conditions improved.

This provoked Republican criticism that the U.S. centralbank was risking inflation and interfering in the politicalprocess through action that, by helping the economy, would favorObama for a second term. But the IMF backed the Fed decision.

"The recent measures by the Federal Reserve on additionalquantitative easing and the extension of its low-interest-rateguidance until mid-2015 were timely in limiting downside risks.Monetary policy needs to remain accommodative while thegovernment and household sectors continue to consolidate."


The WEO also focused on Canada, which the IMF viewed asenjoying a more robust recovery than the United States, thanksin part to "exceptionally favorable financing conditions", butvoiced concern at a resulting rise in household leverage.

"In Canada, the key priority is to ensure that risks fromthe housing sector and increases in household debt remain wellcontained and do not create financial sector vulnerabilities,"the IMF said. "If household leverage continues to rise,additional measures may need to be considered."

(Editing by Neil Stempleman)


Messaging: alister.bull.thomsonreuters.com@reuters.net))