updated 6/22/2007 12:29:18 PM ET 2007-06-22T16:29:18

U.S. economic activity should pick up for the rest of this year and into 2008 as the drag from a decline in the housing market dissipates, the International Monetary Fund said Friday.

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But the IMF warned that growth is uncomfortably close to the 2 percent "stall speed" associated with past recessions even if other accompanying factors _rising unemployment and high interest rates _ are not evident.

"We, like the U.S. authorities, expect a favorable outcome for U.S growth," said John Lipsky, the IMF's leading deputy director, presenting the annual snapshot of the U.S. economy provided for under the rules of the 185-nation lending institution.

"We expect to see a gradual reacceleration towards a sustained pace of around 3 percent by 2008," he said.

Despite a subpar first quarter, the U.S economy should grow 2 percent this year, the IMF said, and 2.75 percent in 2008. The 2007 forecast is slightly below the 2.2 percent estimate the IMF issued in its World Economic Outlook two months ago.

The IMF said that fortunately for the global economy, the recent cooling of U.S. activity from the robust pace of recent years has coincided with a pick up in growth in Europe and Asia.

"We share the U.S. authorities' view that the most likely scenario is a soft landing as growth recovers and inflation falls, although both are subject to risks," the IMF said.

Lipsky said among the risks are rising oil and commodity prices.

The IMF said challenges facing the U.S. economy include raising domestic savings and lowering the trade deficit while resisting protectionism and tackling the longer-term fiscal difficulties posed by rising spending for the government pension plan and health care for the elderly.

"The central fiscal challenge is the projected unsustainable rise of entitlement spending over time," Lipsky said. "This is going to overwhelm in quantitative terms any other fiscal challenge."

The IMF applauded the Federal Reserve's decision one year ago to stop reducing interest rates. The current 5.25 percent interest rate "appears consistent with a soft landing," the IMF said.

The Fed meets next week and is expected to make no change in interest rates.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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