IMF lowers forecast for U.S. economy amid rising policy uncertainty

10:48 | 28/06/2017 Global Economy

The International Monetary Fund lowered its forecast for the U.S. economy on June 27, saying it could no longer assume the Trump administration will be able to deliver pledged tax cuts and higher infrastructure spending.

The IMF, in its annual review of the American economy, 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.

In April, the IMF said President Donald 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.

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.

Technology is reshaping product and labor markets, but productivity growth isn't picking up. An aging workforce is keeping a lid on labor-market expansion, a growth-sapping dynamic that may be exacerbated by more restrictive immigration policies. High government debt prevents spending-led stimulus. And a strong dollar -- estimated by the IMF to be 10% to 20% over a value economic fundamentals warrant -- is weighing on U.S. competitiveness.

"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 Trump administration says its economic platform -- including cutting corporate and income taxes, boosting infrastructure spending and reducing regulations -- will push growth up to a sustained rate of 3% to 4% a year and cut unhealthy government debt levels.

The IMF disagreed, 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.

Given the weaknesses in the economy, the fund said the Federal Reserve should aim to temporarily overshoot its 2% inflation target by gradually easing into its planned interest rate increases.

Theo Foxbusiness