WASHINGTON — The International Monetary Fund warned US leaders that hitting the looming "fiscal cliff" would not only crush the American economy but spin havoc through the rest of the world.
The US needs to shrink its huge fiscal deficit over the medium term but steep spending cuts and tax hikes scheduled for January are too extreme, and are already sending worries across the globe and hitting growth, the IMF said.
The IMF said, in its global economic report released in Tokyo, that the US could plunge back into recession if policymakers fail to agree a way to avoid the poison-pill plan to cut the country's deficit and debt.
"Growth would stall in 2013 with the full materialization of the cliff and... would inflict large spillovers on major US trading partners and also on commodity exporters," the Washington-based global lender said.
The Fund warned the US economy is likely slow slightly next year from this year's forecast 2.2 percent expansion even if the cliff plan is avoided.
Growth has lost momentum, it said, with one factor being the uncertainty related to the outlook for government plans and the eurozone crisis.
The IMF conceded that worries wrought by uncertainty in Europe could help the United States, as capital has moved to the safe-haven dollar, helping to keep US interest low despite the government's hefty debt burden.
However, the IMF warned, this can also drive up prices, hurting the country's exports.
But most worrisome is the so-called "fiscal cliff", an impossible political compromise agreed last year as Democrats and Republicans battled without conclusion over how to close the fiscal deficit over the medium term.
The plan forces deep, immediate spending cuts on the government from January 1, while raising taxes which will crunch household spending.
Legislators are under pressure to come up with an alternative before the end of the year. But, with Congress now on recess ahead of the November 6 national elections, there will be little time to fashion a more moderate plan before the deadline.
If implemented, the IMF said, the plan could cut four percent from gross domestic product.
"It is imperative to avoid excessive fiscal consolidation in 2013, to raise the debt ceiling promptly, and to agree on a credible medium-term fiscal consolidation plan."