IMF cuts month-old US growth forecasts, citing inflation risks

WASHINGTON (REUTERS, BLOOMBERG) – The International Monetary Fund (IMF) cut its growth projections for the US economy this year and next, and raised its unemployment rate estimates through 2025, warning that a broad-based surge in inflation poses “systemic risks” to both the country and the global economy.

Gross domestic product (GDP) in the world’s biggest economy will expand 2.3 per cent this year, the executive board of the Washington-based lender said in its so-called Article IV consultation released on Tuesday (July 13). That is less than the 2.9 per cent it projected last month.

The Fund also cut its 2023 real GDP growth forecast to 1 per cent from 1.7 per cent on June 24, when it met with US officials for an annual assessment of US economic policies.

The final report was revised to reflect downward revisions to US first quarter GDP and weak consumer spending data in May.

But it continued to highlight the challenges of high inflation and the steep US Federal Reserve interest rate hikes needed to control prices.

“The policy priority must now be to expeditiously slow wage and price growth without precipitating a recession,” the IMF said. “This will be a tricky task.”

The Fund said Fed monetary policy tightening should help bring down inflation to 1.9 per cent by the fourth quarter of next year, compared with a forecast of 6.6 per cent for the fourth quarter of this year.

This will further slow US growth, but the IMF still predicted the United States will avoid recession.

IMF Western Hemisphere Department economist Andrew Hodge said in a blog post that Fed rate hikes and less government spending will slow consumer spending growth “to around zero by early next year” easing supply strains.

“Slowing demand will increase unemployment to around 5 per cent by late 2023, which should decrease wages,” Mr Hodge said.

IMF executive directors in their policy prescriptions for the US government called for passage of US President Joe Biden’s stalled social and climate spending proposals, saying these would foster increased labour force participation, which would ease inflation, while helping to facilitate a transition to a low-carbon economy.

“Directors also recommended rolling back the trade restrictions and tariff increases that were introduced over the past five years,” the report said – a reference to tariffs on Chinese goods, steel, aluminium and other products imposed by former president Donald Trump and retained by Mr Biden.

The Fed has pivoted aggressively to fight the hottest inflation in 40 years amid criticism it left monetary policy too easy for too long as the economy recovered from Covid-19.

Policymakers raised interest rates by 75 basis points last month – the single-biggest move since 1994 – and a majority of Fed officials have signalled that another increase of the same magnitude is on the table for July.

US GDP contracted in the first quarter and trackers of economic activity, such as the popular Atlanta Fed indicator GDPNow, suggest it will do so again in the second quarter when data are released on July 28.