The IMF on Friday slashed its US economic growth forecast as aggressive US Federal Reserve interest rate increases cool demand, but predicted that the country would “narrowly” avoid a recession.
In an annual assessment of US economic policies, the IMF said it now expects GDP to grow 2.9 percent this year, less than its most recent forecast of 3.7 percent in April.
The IMF cut next year’s US growth forecast to 1.7 percent from 2.3 percent, and now expects growth to trough at 0.8 percent in 2024.
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In October last year, the IMF predicted 5.2 percent GDP growth for this year, but since then, new COVID-19 variants and stubborn supply chain disruptions have slowed recovery, while a sharp spike in fuel and food prices prompted by Russia’s war in Ukraine further stoked inflation to 40-year highs.
“We are conscious that there is a narrowing path to avoiding a recession in the US,” IMF managing director Kristalina Georgieva told a news conference, adding that the outlook had a high degree of uncertainty.
“The economy continues to recover from the pandemic, and important shocks are buffeting the economy from the Russian invasion of Ukraine and from lockdowns in China,” she said. “Further negative shocks would inevitably make the situation more difficult.”
If large enough, a shock could push the US into a recession, but it would likely be short and shallow with a modest rise in unemployment, akin to the US recession in 2001, IMF deputy western hemisphere director Nigel Chalk said.
Strong US savings would help support demand, he added.
Georgieva said price stability was important to protect US incomes and sustain growth, but there might be “some pain” for consumers in achieving it.
She said her discussions with US Secretary of the Treasury Janet Yellen and US Federal Reserve Chair Jerome Powell “left no doubt as to their commitment to bring inflation back down.”
US inflation by the Fed’s preferred measure is running at more than three times the US central bank’s 2 percent target.
Georgieva said the responsibility to restore low and stable inflation rests with the Fed, and that the IMF views the central bank’s desire to quickly bring its benchmark overnight interest rate up to 3.5 to 4 percent as “the correct policy to bring down inflation.”
The Fed’s policy rates range from 1.50 percent to 1.75 percent.
“We believe this policy path should create an up-front tightening of financial conditions which will quickly bring inflation back to target. We also support the Fed’s decision to reduce its balance sheet,” she said.
While the US Congress’ failure to pass US President Joe Biden’s climate and spending proposals was a “missed opportunity,” Georgieva said, adding that the IMF would support a scaled down version.
“We think the administration should continue making the case for changes to tax, spending and immigration policy that would help create jobs, increase supply and support the poor,” she said.
Georgieva also said the IMF sees clear benefits to rolling back the US import tariffs imposed over the past five years, which include punitive duties on Chinese imports and global tariffs on steel, aluminum, washing machines and solar panels.
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