IMF cuts US growth forecasts, warns on populist threat

The International monetary Fund (IMF) marked down its forecast for the United States this year to 1.6%, from 2.2% in July, due to rise in political uncertainty in the lead up to the November election.

According to the report, a disappointing first half caused by weak business investment and diminishing pace of inventory stockpiling led the Washington-based lender to mark down its 2016 growth forecast.

The Fund does however predict US growth will pick up the following year to 2.2% as the drag from lower energy prices and dollar strength fades.

The cut in the IMF’s forecast underlined the dilemma faced by the Federal Reserve.

According to the Fund, its decision to put further tightening on hold after last December’s rate increase was the appropriate response to growing uncertainty.

The IMF advise any further increase to “be gradual and tied to clear signs that wages and prices are firming durably.”

The report compares the political situation in the US with that of Britain with Brexit. “Similar tensions afflict the US political scene, where anti-immigrant and anti-trade rhetoric have been prominent from the start of the current presidential election round. Across the world, protectionist trade measures have been on the rise,” said chief economist at the IMF Maurice Obstfeld.

Obstfeld said Trump’s proposed plans to raise tariffs on China and Mexico could set off a new trade war with some of the US’s biggest trading partners and have drastic consequences for the US and the global economy.

“The result in some richer countries has been a political movement that blames globalization for all woes and seeks somehow to wall off the economy from global trends rather than engage cooperatively with foreign nations,” said Obstfeld.

According to the report, a global policy response including fiscal and structural reforms to raise growth was now “more urgent than ever” as the cost of rising protectionism can lower global output by almost 1.75% over five years.

Slower growth in developed nations like the US has however been offset by a slightly higher rate of growth in emerging economies.

The IMF’s growth rates for emerging economies have accelerated for the first time in six to 4.2%, which is 0.1% higher than the July forecast. In the following year, emerging economies are expected to grow 4.6%.

This offsetting effect was enough to hold the IMF’s estimate of global growth steady at 3.1% this year, which is the slowest pace of growth since the financial crisis.

“Taken as a whole, the world economy has moved sideways. Without determined policy action to support economic activity over the short and longer terms, sub-par growth at recent levels risks perpetuating itself – through the negative economic and political forces it is unleashing,” said Obstfeld.