IMF argues for gradual removal of fiscal and monetary support in US
The International Monetary Fund trimmed its forecasts for economic growth in the US cautioning about rising levels of public debt, even as it pointed out that the country was in its third-longest expansion since 1850.
It reduced its forecast for US growth this year to 2.1%, from 2.3% in the fund's April update to its world economic outlook. The Washington-based lender also trimmed its projection for the rate of expansion in the US for the following year from the 2.5% seen in Spring to 2.1%.
The Washington-based lender also warned of "larger than usual" risks to the US economy, given policy uncertainties.
In its annual article IV consultation paper, the IMF said: "significant policy uncertainties imply larger-than-usual, two-sided risks to the forecast. On the one hand, a medium-term path of fiscal consolidation, such as that proposed in the budget, would result in a growth rate that is below this baseline.
"On the other hand, spending reductions could be less ambitious and tax reforms could lower federal revenues, providing stimulus to the economy, raising near-term growth (and possibly potential growth), but with negative implications for debt sustainability and the current account imbalance."
America, like so many other nations, was confronting multiple long-term challenges, including technological change, low productivity and an ageing population, according to the lender.
To address these shortcomings, and given the phase of the economic cycle, the IMF advised the US should gradually remove fiscal and monetary support and focus on raising its potential for growth, increasing competitiveness and strengthening the supply side of the economy.
That would also help decrease the current account deficit and improve America's net international investment position.
The US dollar's overvaluation, which the Fund pegged at between 10% and 20%, would also be reduced as a result, with positive 'spill-over' effects on other countries.
On a more positive note, the IMF noted how GDP was 12% higher than its pre-recession peak with job growth persistently strong and, despite, measurement uncertainties, the US economy "appears to be back at full employment".
Nevertheless, it summed up the situation by saying that "the US economic model is not working as well as it could in generating broadly shared income growth."