IMF Cuts US Economy Outlook, Calls Trump's Growth Target Unlikely

The International Monetary Fund cut its outlook for the U.S. economy, removing assumptions of President Donald Trump’s plans to cut taxes and boost infrastructure spending to spur growth.

The IMF reduced its forecast for U.S. growth this year to 2.1%, from 2.3% in the fund’s April update to its world economic outlook. The Washington-based fund also cut its projection for U.S. growth next year to 2.1%, from 2.5% in April.

The world’s biggest economy probably will have a hard time hitting Trump’s target of 3% annual growth as it is faced with problems ranging from an aging population to low productivity growth, and with a labor market already back at full employment, the fund said in its annual assessment of the U.S. economy released June 26.

Given broad uncertainty on policy, “we have removed the assumed fiscal stimulus from our forecast,” Alejandro Werner, director of the IMF’s Western Hemisphere Department, said at a press briefing in Washington.

The IMF’s assessment casts doubt over a more optimistic forecast in the White House budget proposal, which projects growth will accelerate to 3% by 2020 and keep up that pace for seven more years. Even with an “ideal constellation of pro-growth policies, the potential growth dividend is likely to be less than that projected in the budget and will take longer to materialize,” IMF said in a statement June 26.

“The U.S. is effectively at full employment,” the lender said. “For policy changes to be successful in achieving sustained, higher growth, they would need to raise the U.S. potential growth path.”

Accelerating Growth

Growth surges on the scale Trump is predicting have been rare in the United States and abroad, according to the IMF, which says there are only a few cases of such leaps among advanced economies since the 1980s. Those episodes mostly took place in the mid- to late-1990s, when global demand was strong, and many of the cases came when economies were recovering from recessions, IMF said. The only time the U.S. economy accelerated at such a pace came in the early 1980s, when it was recovering from a deep recession.

IMF notes the United States is enjoying its third-longest expansion since 1850, with “persistently strong” job growth. Growth will slip to 1.9% in 2019 and 1.8% in 2020, according to the fund’s forecasts.

IMF officials said the details of the Trump administration’s economic policies appear undecided. As a result, the fund didn’t include in its projections the effects of any tax reforms — which the administration has said is a priority but will need congressional approval — or Trump’s proposed budget cuts.

The economy’s medium-term outlook is clouded by imbalances, including rising public debt and a currency that is “moderately” overvalued between 10% to 20%, the fund said.

Broken Model

“The U.S. economic model is not working as well as it could in generating broadly shared income growth,” IMF said. “Most critically, relative to historical performance, post-crisis growth has been too low and too unequal.”

The United States is having trouble adapting to trends such as changes to the job market from technology, low productivity growth and an aging population, IMF said, noting that household incomes are stagnating for a large share of the population.

IMF again suggested the Federal Reserve should be ready to let price growth modestly overshoot its inflation goal, a move that would “provide valuable insurance against the risks of disinflation and having to bring the federal funds rate back to zero.”

To raise revenue, the U.S. government should consider a “broad-based” federal consumption tax, a higher federal gas tax and put in place a carbon tax on greenhouse gas emissions, IMF said — proposals that may be far-fetched under Republican control of Washington.

The IMF report also weighed in on the health care debate consuming Washington, where Republican lawmakers are developing plans to repeal legislation brought in under former President Barack Obama.

Changes to Obamacare “ought to be undertaken carefully to avoid compromising the pooling of risks — an essential foundation for a well-functioning health insurance system — or excluding those with limited incomes from the healthcare system,” IMF said.