World Economy

Lacking Comprehensive Policy Package: IMF Cuts US Growth Outlook

The world’s largest economy is facing rising public debt and an overvalued currency which tends to hinder exports
Lacking Comprehensive Policy Package: IMF Cuts US Growth OutlookLacking Comprehensive Policy Package: IMF Cuts US Growth Outlook

In an indication that Trump administration’s tax cut and fiscal spending plans are not likely to boost economic growth, the international Monetary Fund has revised its 2017 gross domestic product growth forecast for the US from 2.3% to 2.1%. In addition to that, the IMF also cut its forecast for 2018 US GDP growth to 2.1% from 2.5%.

The IMF in January raised the estimates on the expectation of fiscal stimulus from the Trump administration, but have reverted back to the previous calculations, news outlets reported.

During the annual discussions with US officials on the outlook for the economy, "it became evident that many details about these plans are still undecided," the IMF said of the administration's planned reforms in the so-called Article IV report.

The fund's economists previously had factored in spending stimulus equivalent to 2% of the economy from 2017 to 2019, but that was removed.

The IMF warned that "significant policy uncertainties imply larger-than-usual" risks to the US forecasts on either side, since spending cuts could lower growth, while tax cuts could provide stimulus and expand the economy.

Even while the United States is seeing its third longest expansion since 1850 and is at full employment, the world's largest economy is facing rising public debt and an overvalued currency—which tends to hinder exports. "A comprehensive policy package is needed" to respond to those challenges, the report said.

However, the discussions "revealed differences on a range of policies and left open questions as to whether the administration's proposed policy strategies are best suited to achieve their intended purpose."

'Disproportionate' Burden

In fact, the IMF called into question the stated goal of the (President Donald) Trump administration to accelerate growth to more than 3%. "It is unlikely this set of policies can generate an acceleration in growth of one percentage point," said Alejandro Werner, director of the IMF's Western Hemisphere Department.

International experience and US history show only a few examples of economies achieving growth of that magnitude, and usually it was after a recession when unemployment was high, he told reporters. In contrast, the US unemployment rate is at a historic low of 4.3%.

The IMF called for policies to raise the potential growth rate of the US economy, including through investments in improved education and training programs, and policies to provide incentives to work, such as an earned-income tax credit. 

"The US economic model is not working as well as it could in generating broadly shared income growth," Werner said during a press conference.

The IMF warned of "significant uncertainties" regarding fiscal consolidation, infrastructure investment, renegotiation of trade treaties and immigration policy as some of the factors in the more cautious forecast for the US economy, indiatvnews reported.

The international financial institution also said that calls for protectionism and economic nationalism by US authorities cast medium-term shadows on the economy and "a broader retreat from cross-border integration would represent a downside risk to trade, sentiment and growth".

The report however criticized the administration proposals put forth so far, with deep spending cuts "that, in the staff's view, would seem to place a disproportionate share of the adjustment burden on low- and middle-income households."

Overturning Health Care Bill

The report came out as the US Senate is debating a controversial health care reform bill aimed at overturning Obamacare, which the non-partisan Congressional Budget Office said would cause an additional 22 million people to lose their health insurance by 2026.

However, US officials participating in the discussions agreed with the IMF view that uneven growth has created "important social problems" and shared the objective of trying to reverse these trends to achieve a "more even distribution of the gains," Werner said.

The report also warned against measures that would make the United States less open to trade, even while there is room to modernize pacts like the North American Free Trade Agreement, a process Washington already has begun.

The United States "ought to be judicious in its use of import restrictions," the IMF said. 

After being sworn in on January 20, Trump promised to jump-start the US economy and generate annual GDP growth of 3% during his term in the White House.

Regarding Washington's monetary policy, the IMF, which is led by Managing Director Christine Lagarde, said the US economy was approaching full employment with a stable inflation rate and the Federal Reserve should continue gradually raising short-term interest rates, currently between 1% and 1.25%.

The US dollar, according to the IMF, is "moderately overvalued" between 10% and 20%.

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