The sluggish US economy is taking longer to pick up than anticipated, according to the latest figures and comments from the Federal Reserve chairman Alan Greenspan.

Mr Greenspan, in his twice-yearly testimony to Congress, said the central bank was cutting its forecast for US economic growth this year by three quarters of a percentage point to 2.5-2.75%.

The downgrade came on the day the Bush administration predicted that the federal deficit would surge to a record $455bn this year thanks to tax cuts, economic weakness, and the cost of war in Iraq and the fight against terrorism.

Cautious optimism

Mr Greenspan described economic growth in the first half of 2003 as "sluggish".

Mr Greenspan appeared before a congressional panel

He blamed the war in Iraq and ongoing caution by businesses, reluctant to invest or hire more workers.

But he said the Federal Reserve Bank expects economic activity to "accelerate in the second half of this year and to gather momentum in 2004".

"We believe that we are at a turning point," Mr Greenspan said, hinting that there are already some signs of an economic recovery.

A glimmer of hope for the economy came from figures for US retail sales, which rose by 0.5% in June, the biggest increase in three months.

Retail sales are seen as a reliable guide to the health of the economy in the US, where consumer spending accounts for two thirds of all economic activity.

Economists said last month's increase reflected lower interest rates, with homeowners taking advantage of cheaper borrowing costs to remortgage their properties.

Rate cuts

US interest rates are now at a 45-year low, but Mr Greenspan said a further "substantial" cut was possible to guard against any destabilisation and help fuel a faster economic recovery.

Consumer confidence seems to be picking up

On 25 June, the Federal Reserve cut interest rates by a quarter of a percentage point to 1% - their lowest level in 45 years.

The Fed chairman said interest rates would stay low for "as long as it takes".

He said the June meeting of the Federal Open Market Committee (FOMC) had concluded: "The available evidence did not yet compellingly demonstrate that a material step-up in economic growth was underway."

Mr Greenspan said the goal now was to get the US economy growing at a faster rate, and suggested companies will need more employees as productivity picks up.

""If, and as we strongly expect, the growth rate will be picking up in the months ahead and rising above the relevant rate of productivity, then clearly increased work forces will be required to meet the increased growth," he told the House of Representatives.

Deficit fears

But the US deficit continued to cause concern.

The US treasury secretary John Snow described it as "manageable" but "unwelcome".

Mr Snow said the report had prompted him to redouble efforts to cut government spending.

The White House revealed new forecasts for the ballooning budget deficit, suggesting it would reach $455bn this year and $475bn in the next financial year starting 1 October.

"We are drifting into bigger and bigger deficits and what I find alarming is that neither party is willing to give up its political priorities to do anything about it," said Robert Bixby, executive director of the Concord Coalition.

Mr Greenspan said the deficit "mattered a great deal" and that he had long argued for "fiscal responsibility".

"I trust recent numbers will push government more and more to... a stable fiscal outlook," he said when questioned about the latest deficit figures.

The White House also projected a halving in the deficit to $226bn by 2008.