IMF cuts US forecast, issues warning

IMF Managing Director Christine Lagarde speaks at the International Monetary Fund's headquarters on June 16, 2014 in Washington, DC. -- PHOTO: AFP
IMF Managing Director Christine Lagarde speaks at the International Monetary Fund's headquarters on June 16, 2014 in Washington, DC. -- PHOTO: AFP

WASHINGTON (AFP) - The International Monetary Fund on Monday slashed its forecast for the United States and urged policymakers to keep interest rates low and raise the minimum wage to strengthen growth in the world’s largest economy.

The global crisis lender said in its annual report card on the US economy that the country will likely grow only 2.0 per cent this year, compared with the previous 2.8 per cent estimate, blaming mainly the unexpected contraction in the first quarter.

It said growth is likely to rebound to 3.0 per cent next year, but to ensure that, the government should take measures like increasing the minimum wage and embarking on a strong infrastructure-building programme.

Moreover, the US Federal Reserve should not expect the economy to get back to full employment before the end of 2017, and that it could afford to hold its key interest rate at the zero level past the middle of next year, when the Fed has signalled it expects to raise the rate.

“The scars of recession are still visible,” IMF managing director Christine Lagarde warned.

She cited still-high long-term unemployment, low labor-force participation, and the fact that some 50 million Americans still live in poverty.

“There is no single measure that is going to deal with all those issues,” she said.

“The US should invest in its future... The priority is to invest in people and to invest in infrastructure.” The IMF report said that the US labor market remains significantly weaker than is implied by the headline 6.3 per cent unemployment rate.

It pointed to stagnant wages and the low workforce participation rate, now 62.8 per cent compared to more than 66 per cent before the 2008 economic crisis.

The IMF said the US government could afford to take short-term measures to strengthen growth and jobs, despite the ongoing large fiscal deficit and huge government debt burden.

But it said that warring political parties need to come up with a medium-term plan for addressing those problems, one that includes revising the tax structure to raise revenues, cutting the growth of health care costs, and fundamentally reforming the government’s social security pension programme.

“Given the substantial economic slack in the economy, there is a strong case to provide continued policy support,” the Fund said.

It said more government efforts to boost growth short term would allow the Federal Reserve to more comfortably exit its easy-money stance and cut the risks that stance poses to global financial stability.

At the same time, the IMF said that “regrettably,” US politicians have been unable to agree on such an approach.

Stepping into a hot domestic political battle, the IMF took the side of the administration of President Barack Obama in advocating a rise in the minimum wage.

It noted that, in real terms, wages have fallen significantly over the past four decades, an issue which economists say locks many Americans in poverty.

The Fund said that nearly 50 million Americans still live in poverty, and that the principal way government policy could help would be to return to stronger growth and job creation.

But it added that increasing the minimum wage from the current federal government standard of US$7.25 an hour “would help raise incomes for millions of working poor.”

“Any increase of that minimum wage would be helpful from an economic point of view,” said Ms Lagarde.