IMF cuts US growth forecast as prospects for fiscal stimulus fade
President Donald Trump’s struggle to deliver a fiscal stimulus this year has prompted the International Monetary Fund to cut back its growth forecasts for the US economy — just months after it boosted its outlook on hopes of a policy overhaul.
Following slow progress by the White House and Capitol Hill on long-mooted tax reforms, the fund on Tuesday lowered its prediction for gross domestic product growth this year to 2.1 per cent, down from an earlier forecast of 2.3 per cent. The fund reduced its growth outlook for 2018 to 2.1 per cent from 2.5 per cent. It also delivered a highly sceptical assessment of the administration’s growth predictions, pouring cold water on White House claims that its policies would help deliver a sustained 1 percentage point acceleration in annual growth. The fund warned that there were few recorded cases of advanced economies achieving such a leap.
Trump administration officials have vowed to boost growth by getting tax legislation to the floor of Congress in September as well as pushing through an infrastructure spending blitz. But infighting in the party over divisive healthcare reform plans, coupled with a White House distracted by the probe into alleged Russian interference in the US election, has contributed to repeated delays.
In its annual Article IV report on the US, the IMF said lawmakers should throw their weight behind a fundamental tax reform package that would, among other things, simplify the tax system, lower rates and strip away exemptions.
But the fund said it had become clear during its discussions with the US authorities that “many details” on plans for tax, public spending and deficit reduction were still unsettled, meaning its forecast now assumes no change to existing policies.
“The consultation 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,” the IMF said. The Treasury said in a statement that “the administration acknowledges the IMF’s surveillance role through the Article IV consultation process and we appreciate the IMF’s support of [our] broad policy objectives”. It added: “We are focused on making significant reforms to our tax and regulatory policies, as well as renegotiating trade agreements to be more balanced for American workers which will lead to stronger economic growth and job creation.”
The fund’s critical assessment comes at a delicate time for its relations with the Trump administration. Christine Lagarde, IMF managing director, has worked hard to build ties with Treasury Secretary Steven Mnuchin and Gary Cohn, the National Economic Council director. But the administration has reacted angrily to previous IMF warnings against US protectionism, with commerce secretary Wilbur Ross dismissing them as “rubbish” in April.
The IMF on Tuesday urged Washington to be “judicious” in its use of import restrictions justified on national security grounds, as the administration considers whether steel imports pose a security threat. The fund warned that a retreat from cross-border integration would represent a “downside risk to trade, sentiment and growth”.
Mr Mnuchin and Mr Cohn unveiled tax ideas in April, but these were widely criticised as lacking in substance and implying a multi-trillion-dollar deficit blowout. The administration has also unveiled a budget plan that aims to balance the books over 10 years, but the IMF declined to build those ideas into its forecasts.
The fund signalled its scepticism about the budget as it described the underlying growth assumptions as “extremely optimistic”. While the administration built in growth projections of 3 per cent by 2021, the IMF sees US growth subsiding to an underlying potential rate of 1.8 per cent by 2020.
“Even with an ideal constellation of pro-growth policies, the potential growth dividend is likely to be less than that projected in the budget and will take longer to materialise,” it said. While the report advocated targeting a federal primary surplus of 1 per cent of GDP in the medium term, it criticised the Trump budget for advocating swingeing cuts to discretionary spending.
These, it said, would put a “disproportionate share of the adjustment burden on low- and middle-income households”.
More than half of the US population have lower inflation-adjusted incomes today than in 2000, prospects for upward mobility are “waning” and, at 13.5 per cent, the poverty rate is among the highest in advanced nations, it said. As a result, the IMF said it was advocating a host of economic reforms, including tax changes to incentivise higher labour force participation and support for low and middle-income households.
The IMF also set out recommendations to the Federal Reserve, which has embarked on a steady progression to more normal interest rates. The IMF said policy rates should continue to rise and that the Fed was right to be preparing an unwinding of its quantitative easing programme. But the report added that given recent weaknesses in inflation data, the Fed should be ready to accept “some modest, temporary overshooting of its inflation goal” of 2 per cent.