IMF Cuts U.S. Economy Forecast -- Update
27 June 2017 - 8:12PM
Dow Jones News
By Ian Talley
WASHINGTON -- The International Monetary Fund cut its forecast
for the U.S. economy Tuesday, 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.
That target is "an extremely optimistic growth assumption," the
IMF's economists said.
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 boost 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.
The White House and congressional leadership are still looking
at a tax overhaul this year. But 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 1 percentage point is
unlikely, the IMF said.
The U.S. Treasury said in a statement Tuesday, "We appreciate
the IMF's support of the administration's broad policy objectives,
including the need to stimulate infrastructure investment, simplify
the tax system, and boost educational opportunities."
The fund backs an overhaul of the U.S. tax code, cutting
corporate taxes, and getting rid of exemptions. It also supports
budget belt-tightening to slim the deficit and trim public debt,
and boosting infrastructure spending. But the fund says the
administration's plan doesn't add up.
"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 fund said.
To put the country's finances back on a healthy path, the IMF
said, some sort of consumption tax would be necessary, such as a
tax on carbon emissions or gasoline. And, it said, Mr. Trump's
proposed budget cuts would disproportionately affect the poor and
middle class and should be moderated.
The fund also warned against a White House plan to invoke
national security to raise tariffs on steel imports, saying there
was room for renegotiating trade deals such as the North American
Free Trade Agreement in a way that was mutually beneficial.
"The U.S. ought to be judicious in its use of import
restrictions on national security grounds and avoid measures that
inadvertently weaken, rather than strengthen, the overall economy,"
it 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.
Write to Ian Talley at ian.talley@wsj.com
(END) Dow Jones Newswires
June 27, 2017 14:57 ET (18:57 GMT)
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