IMF saw a positive picture of the US economy in a report released yesterday, but warned of fiscal and trade policy. IMF said that near-term outlook for the U.S. economy is one of strong growth and job creation. And, a slow but steady rise in wage and price inflation is expected as labor and product markets tighten. It projects US economy to grow 2.9% In 2018 and 2.7% in 2019 but slow sharply to 1.9% in 2020. Core PCE is projected to hit 2.0% in 2018 and accelerate to 2.3% in 2019 before slowing back to 2.2% in 2020.
Regarding fiscal policy, IMF warned that the combined effect of the administration’s tax and spending policies will cause the federal government deficit to exceed 4.5% of GDP by 2019. And, such a procyclical fiscal policy will elevate the risks to the U.S. and global economy. The risks include higher public debt, a inflation surprise, international spillover, future recession and increased global imbalances. IMF said Fed will need to raise policy rates at a faster pace to achieve its dual mandate. And policymakers should be ready to accept some modest, temporary overshooting of its medium-term inflation goal
On trade, IMF warned that the measures to impose new tariffs or otherwise restrict import “are likely to move the globe further away from an open, fair and rules-based trade system, with adverse effects for both the U.S. economy and for trading partners”. Risks include:
- Catalyzing a cycle of retaliatory responses from others, creating important uncertainties that are likely to discourage investment at home and abroad.
- Expanding the circumstances where countries choose to cite national security motivations to justify broad-based import restrictions. As such, this has the potential to undermine the rules-based global trading system.
- Interrupting global and regional supply chains in ways that are likely to be damaging to a range of countries, and to U.S. multinational companies, that are reliant on these supply chains.
- Impacting a range of countries, particularly some of the more vulnerable emerging and developing economies, through increased financial market or commodity price volatility associated with these trade actions.
Full report here.