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IMF cuts US growth forecast, warns of growing risks
WASHINGTON, April 10, 2019 (BSS/AFP) – The International Monetary Fund on
Tuesday cut its US growth forecast significantly for 2019 but said the United
States is still likely to outpace other advanced nations as the world economy
slows.
The global crisis lender also warned of hazards on the horizon, especially
the continued trade tensions with China and other countries, as well as
mounting corporate debts and the delicate challenges facing the central bank
in coming months.
In the latest World Economic Outlook, the IMF portrayed the United States
as an exception to the current slowing trend among rich nations — with
strong consumer demand, robust labor markets and higher industrial output
than its rivals.
The world’s largest economy is now expected to expand at a 2.3 percent
clip this year, down from the 2.5 percent expected in January, but still
relatively strong, according to the report released ahead of this week’s
spring meetings of the IMF and World Bank.
US growth is projected to slow further to 1.9 percent in 2020, slightly
higher than forecast in January, boosted by the Federal Reserve’s indications
it will not raise interest rates for the foreseeable future.
“There has been a pivot with the Fed, with a pause in the expectation of
rate rise in 2019,” IMF chief economist Gita Gopinath told reporters.
That move was welcome as it has offset “some of the downside risks that
were building up towards the end of 2018,” she said.
However, she added, “If we do have the recovery that we are projecting by
2020, that could change policy stance.”
The stimulus provided by US tax cuts last year is fading, while the
extended government shutdown also took a bite out of growth in 2019.
The IMF outlook assumes that the current truce in the US-China trade war
will persist and lead to a more permanent agreement. But if the dispute
flares up or spreads to autos, that could erode business sentiment and slow
growth, the report warned.
As US domestic demand continues to support higher imports and the budget
deficit balloons, the trade deficit could swell further, “which could
aggravate trade tensions,” the report said.
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A “durable resolution of trade uncertainty” created by the US and China
would be “very positive for global growth,” Gopinath said at a news briefing,
also warning against expanding the dispute to more sectors.
– Rising corporate debt –
The IMF also warned that corporate debt was increasingly risky, with bond
investors and others lending to a growing number of low-rated issuers or
borrowers who offered little protection in the event of a default.
“If US growth were to weaken, such financial fragilities could amplify and
prolong the slowdown,” the IMF cautioned.
That would leave companies to choke on burdensome debt payments and suffer
credit downgrades, forcing them to slash spending as a result.
However, Gopinath said that if inflation remains low, the central bank
could have space to provide more support to the economy if needed.
The Federal Reserve, which has said it does not expect to raise interest
rates again in 2019, could nevertheless feel compelled to do so in the second
half of the year as wage growth accelerates and the shortage of workers
continues, the report said.
The Fed could face a difficult policy challenge: raising borrowing costs
could erode business activity and growth, but delaying a rate hike in the
face of inflation pressures “could contribute to financial vulnerabilities
and a sharper downturn down the road.”
What happens in the US economy typically feeds through to the broader
global economy.
BSS/AFP/HR/1030