By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-Global lender, The International Monetary Fund (IMF) has cut its growth forecast for the US economy to 2.5 percent from 3.1 percent and said the economy is bouncing back.
According to the IMF, despite a slowdown in growth during the first few months of 2015, the U.S. economy is strengthening and there are steady gains in job creation.
The IMF says in its Article IV consultation with the U.S. that its economy momentum in the first quarter (Q1) was sapped by unfavourable weather, a sharp contraction in oil sector investment, and the West Coast port strike, it said.
“But the underpinnings for a continued expansion remain in place. A solid labour market, accommodative financial conditions, and cheaper oil should support a more dynamic path for the remainder of the year. Despite this, the weaker outturn in the first few months of this year will unavoidably pull down 2015 growth, which is now projected at 2.5 percent. Stronger growth over the next few years is expected to return output to potential before it begins steadily declining to 2 percent over the medium term,’ the global financial institution added.
However, the IMF affirmed that stronger growth over the next few years is expected to return output to potential before it begins steadily declining to 2 percent over the medium term.
“Inflation pressures remain muted. In May headline and core personal consumption expenditure (PCE) inflation declined to 0.2 and 1.2 percent year on year, respectively. Long-term unemployment and high levels of part-time work both point to remaining employment slack, and wage indicators on the whole have shown only tepid growth,” it said.
The global lender further affirmed when combined with the dollar appreciation and cheaper energy costs, inflation is expected to rise slowly staring later in the year, reaching the Federal Reserve’s 2 percent medium-term objective by mid 2017.
It added that an important risk to growth is a further U.S. dollar appreciation. “The real appreciation of the currency has been rapid, reflecting cyclical growth divergences, different trajectories for monetary policies among the systemically important economies, and a portfolio shift toward U.S. dollar assets,” the report noted.
The Fund’s annual review on the state of the U.S. economy Article IV report said lower oil prices and increasing energy independence have contained the U.S. current account deficit, despite the cyclical growth divergence with respect to its main trading partners and the rise in the U.S. dollar. “Nevertheless, over the medium term, at current levels of the real exchange rate, the current account deficit is forecast to widen toward 3.5 percent of GDP,” the Article IV report affirmed.
The Fund again warned the Federal Reserve to defer interest rate increase until greater signs of wage or price inflation affirming such a data-dependent approach would imply keeping the federal funds rate at 0–0.25 percent into the first half of 2016, with a gradual rise in the federal funds rate thereafter.
IMF directors acknowledged that financial stability risks could arise from a protracted period of low interest rates. In this regard, they underscored the importance of strong regulatory, supervisory, and macroprudential frameworks to mitigate these risks.
Similarly, the global lender says U.S needs to put public finances on sustainable path, address fiscal imbalances. “Looking forward, U.S. public finances remain on an unsustainable path. The IMF called for a credible plan to address these imbalances, one that includes revenue-enhancing reforms to the tax system, a pension reform that aligns contributions and benefits, and steps to lessen the growth in public healthcare costs,” it says.
“Such a plan could provide some modest, near-term fiscal space to finance supply-side measures that support growth, job creation, and productivity.”