WASHINGTON - The US economy, which is facing increasingly downside risks, will cause global "severe shock" if the country's debt ceiling not raised in time, the International Monetary Fund (IMF) reported on Monday.

Weak Outlook and Increasing Risks

In its annual assessment of the world's largest economy, the IMF projected that US economy to grow 2.5 percent in 2011, slower than the 2.9 percent growth pace in 2010.  

From 2012 to 2016, the US gross domestic product (GDP) growth rates are all below 3 percent, a pace that not fast enough to significantly reduce the country's stubbornly high level of unemployment rate, currently at 9.2 percent.

Looking ahead, the IMF said the US recovery is expected to continue despite the expected fiscal tightening, helped by accommodative monetary policy, while inflation should remain subdued.

Over the medium term, both saving and investment are projected to rise, leaving the current account deficit broadly stable around current values.

However, the IMF sees downside risks to the US economic outlook have increased.

These include: renewed housing market weakness, with the possibility of larger-than-expected house price declines; unfavorable fiscal outcomes;further commodity price shocks, which could impact both growth and inflation; credit supply constraints; and challenging conditions for some European sovereigns.

Fiscal Hardship and Spillover Effects

Notably, the IMF warned on the US fiscal challenge, emphasizing that the US economy as well as world economy will suffer if policy makers in Washington will not raise the country's borrowing limit. It also suggested the U.S. to take "gradual" measures on fiscal adjustment.

"Directors (on the IMF board) highlighted the urgency of raising the federal debt ceiling and agreeing on the specifics of a comprehensive medium-term consolidation program," the global lender said.

The IMF report revealed at a time when the US two parties are in intensive negotiations on the country's borrowing limit and spending reduction.

With the clock ticking down to the August2 deadline of averting the US from an unprecedented default, politicians in Washington remain split.

IMF staff said risks to the US outlook were rising. Those include the possibility of a sudden increase in interest rates or a sovereign downgrade in US debt - basically a decision by ratings agencies to rank the United States as less creditworthy - if agreement to raise the debt ceiling and install a medium-term plan for debt reduction is not soon reached.

"These risks would also have significant global repercussions, given the central role of US Treasury bonds in world financial markets," the IMF said.

On global impact, the IMF said "spillovers from credible and gradual fiscal consolidation are limited", while those from a loss of confidence in US debt sustainability "are universally large and negative."

An IMF official, briefing reporters by telephone, said that if the United States' AAA debt rating - regarded as the gold standard for creditworthiness - was downgraded it could be " extremely damaging" for the US and world economy.

"The federal debt ceiling should be raised expeditiously to avoid a severe shock to the US economy and world financial markets, " the Washington-based international financial institution said.

The IMF projected US public debt at 99.0 percent of gross domestic product this year, rising to a ratio of 103.0 percent in 2012, higher than its June estimates.

The Executive Directors of the fund welcomed the administration 's objective to stabilize the debt ratio by mid-decade and gradually reduce it afterward.

"A politically-backed medium-term framework that raises revenues and addresses long-term expenditure pressures should be the cornerstone of fiscal stabilization," it added.