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Bernanke expects signs of recovery by year end

Ben Bernanke, the chairman of the Federal Reserve, said in testimony to a congressional committee on the American budget that he still expects signs of a recovery by the end of 2009.

Although noting that real gross domestic product (GDP) fell at an annual rate of 6% in the fourth quarter of last year, and the country has shed almost 6 million jobs since the start of last year, Bernanke says there are tentative signs that the contraction “may be slowing”.

These include consumer spending—which has remained flat since the start of this year—and a reduction of inventories built up over last year when production was outstripping demand. He says as inventories fall further firms will have greater motivation to increase production which should reverse the downwards trend in America’s GDP.

These factors mean that the Federal Reserve’s economists “continue to expect overall economic activity to bottom out, and then to turn up later this year”. This, however, is dependent on the successful repair of the financial system and the consequent improvement of credit conditions.

Bernanke also took the opportunity to issue a warning shot to the Obama administration over the pressing need to deal with the country’s worsening fiscal position once the economy is on the path to recovery.

In particular, the chairman says increasing medical costs, which he projects will rise from 8.5% of GDP today to 12.5% of GDP by 2030 under existing plans, will be unsustainable without significant policy change.

“Clearly, the Congress and the Administration face formidable near-term challenges that must be addressed. But those near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances,” says Bernanke. “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.”

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