White House cuts growth forecast

President Barack Obama today sharply cut estimates for US economic growth, underscoring the difficult challenge he faces in spurring a stronger recovery and creating more jobs.

The president, who must curb high unemployment to improve his chances of winning re-election in 2012, will give a major speech next week on how he plans to lift hiring and growth.

"The economic projections make clear there is a real need in the short term to kick start economic growth and get on a sustained higher growth path," White House budget chief Jack Lew told reporters on a conference call.

In a midyear review of its annual budget, the White House offered some hints of what Mr Obama will say next week. It said the speech could include proposals for a mixture of tax cuts aimed at middle class families, infrastructure spending and aid for the long-term unemployed.

Under the new projections, the White House said the deficit would come down more sharply than expected to 8.8 per cent of GDP this year, compared with the 10.9 per cent forecast when the budget was released in February.

The improvement was largely due to spending cuts imposed under a deal struck last month by Mr Obama and opposition Republicans to raise the US debt ceiling, which will shave $1.45 trillion from the deficit over the next 10 years.

But economic growth was marked down. The White House acknowledged that the outlook had deteriorated amid sharp financial market turbulence following ratings agency Standard & Poor's downgrade of the AAA US credit rating.

As a result, it offered an alternative economic forecast based on what has happened in recent weeks. This projects GDP growth this year of 1.7 per cent, compared with 2.7 per cent expected back in February, with 2.6 per cent forecast for 2012, down from a 3.6 per cent prediction in February.

However, the more subdued growth outlook did not have a major impact on the expected deficits, and growth was expected to rebound to above 4 per cent by 2015.

In the latest reading from the economy, US manufacturing unexpectedly grew in August and fewer Americans filed new claims for jobless aid last week.

The White House review predicted unemployment to average 9.1 per cent this year and 9 per cent in 2012, when Mr Obama faces re-election.

"Despite recent setbacks, the Administration expects the economy to grow at increasing rates in the months and years to come," the White House said. "The potential for a sharp recovery is present," it added, noting abundant capacity in the economy to increase output, including the high unemployment.

Congress must find at least $1.2 trillion in deficit reduction measures over the next 10 years. If it fails to act before late December, mandatory spending cuts of $1.2 trillion will be imposed equally on defense and non-defense spending, kicking in from 2013 and running through 2021.

Mr Obama has not yet laid out a detailed set of deficit reduction and job creation recommendations. But he has talked about measures to boost revenues by reforming the tax code to close some loopholes, and taking steps to reduce the long-term costs of popular entitlement programmes like Social Security and Medicare for older Americans.

The White House said he will lay out these recommendations to a congressional committee tasked with finding budget savings later this month.

Reuters