The IMF has cut its US GDP forecast to 2.1% in 2017 from 2.3% projected in April and to 2.1% for 2018 from 2.5% previously, it said in a statement following its U.S. Article IV Consultation, and saying it could no longer assume the Trump administration will be able to deliver pledged tax cuts and higher infrastructure spending. Specifically, in giving up on the Trump agenda, the fund said "we have removed the assumed fiscal stimulus from our forecast."
Worse, the revised US forecast is now expected to peak in 2017, remains flat in 2018, and then continues to decline to 1.7% by 2022, which once upon a time was considered stall speed.
In its annual review of the American economy, the IMF questioned the White House’s plan to accelerate output and said it was skeptical the administration would be able rev up the world’s largest growth engine to a sustained 3% annual rate. Instead, the fund forecasts the growth rate will steadily fall over the next five years to around 1.7%, assuming no major policy changes.
IMF GDP Forecast:
Amusingly, it was only in April that the IMF said President Trump’s tax-overhaul plans and spending stimulus could goose the growth rate to 2.5% next year, up from 2.3% this year. But after talks with administration officials amid still-evolving policy plans, the fund says it can no longer factor such fiscal stimulus into its forecasts. The IMF now says the economy will expand by 2.1% this year and next.
And, as the WSJ notes, Initial optimism about the administration’s ability to get a tax revamp and infrastructure spending has faded in the face of mounting political hurdles. "Meanwhile, buoyant stock prices, one of the longest expansions in U.S. history and a precrisis jobless rate belie an economy facing considerable challenges ahead, the fund warned."
“All in all, in our judgment, the U.S. economic model is not working as well as it could in generating broadly shared income growth,” said Alejandro Werner, head of the IMF’s Western Hemisphere department.
The IMF also disagreed with the Trump's administration's optimistic economic forecasts, questioning whether the package as proposed will deliver the administration’s long-term growth targets, balance the budget and cut public debt.
“Even with an ideal constellation of progrowth policies, the potential growth dividend is likely to be less than that projected in the budget and will take longer to materialize,” the IMF said. International experience and U.S. history suggest a sustained acceleration in annual growth of more than one percentage point is unlikely, the IMF said.
Of note: the IMF said that given the weaknesses in the economy, the Fed should aim to temporarily overshoot its 2% inflation target by gradually easing into its planned interest rate increases. And some of us are old enough to remember when cutting rates was supposed to boost inflation...
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Some of the highlights from the IMF statement:
- “The outlook is clouded by important medium-term imbalances. The U.S. economic model is not working as well as it could in generating broadly shared income growth”
- “Real GDP is now 12 percent higher than its pre-recession peak, job growth has been persistently strong, and the economy appears to be back at full employment”
- Fed should continue to gradually raise interest rates “in a data dependent way” and it must accept modest, temporary overshoot of its inflation goal
- Fed must well-telegraph balance sheet reduction plans
- U.S. needs lower tax rate, simpler system, fewer exemptions
- “Tax reform should focus on increasing revenues- GDP over the medium term including through a broad-based federal level consumption tax, a carbon tax, and a higher federal gas tax”
- U.S. can improve trade deals like Nafta also to the benefit of its trading partners
- “The U.S. would benefit by remaining open as it pursues new or amended trade agreements”
- Skilled-based immigration to U.S. can boost labor participation and productivity
- Current financial regulation approach should remain intact
- “There is scope to fine-tune some aspects of the system, notably to reduce the compliance burden for smaller banks. However, the current approach to regulation, supervision, and resolution should be preserved.”