US economy 'overall in good shape' despite overvalued dollar: IMF

Pedestrians walk past the New York Stock Exchange (NYSE) in New York.
Pedestrians walk past the New York Stock Exchange (NYSE) in New York.PHOTO: BLOOMBERG

WASHINGTON (Reuters) - The International Monetary Fund said on Wednesday the United States economy was "overall in good shape," with growth set to regain momentum despite an overvalued dollar, but it warned that too many Americans were dropping out of the workforce or living in poverty.

The IMF expects US economic growth of 2.2 per cent in 2016, a downgrade from 2.4 per cent it forecast in April. But the Fund maintained its outlook for growth to recover to 2.5 per cent in 2017, with inflation rising slowly toward the Federal Reserve's goal of two percent, it said in a statement at the conclusion of its annual review of US economic policies.

The statement showed the Fund now views the dollar as overvalued by 10 per cent to 20 per cent, based on real effective exchange rates against a broad range of global currencies.

IMF Managing Director Christine Lagarde told a news conference that was not the result of currency manipulation by US trading partners to gain export market share, but of global uncertainty causing a rush into dollar assets.

"The appreciation of the dollar in the last 12 months is probably attributable to the level of uncertainty that there is around, as well as to variations of commodity prices that often have a direct impact on the valuation of the dollar relative to other currencies," she said.

She also cautioned against "abrupt" interest rate hikes by the Federal Reserve, saying that the Fund believed the US central bank should make stability its highest priority, with gradual, well-communicated hikes.

She said any Fed move should be data-driven and "be supportive of the economy and that it not be such that a reversal be required."

The IMF identified four key challenges to US growth: declining labor force participation as the population ages, declining productivity growth, an increasingly polarized society with income gains concentrated among the wealthiest Americans, and too many people living in poverty.

The IMF cited US census data showing 46.7 million people, or 15 per cent of Americans now live below the poverty line, including one in three households headed by women.

It urged US policymakers to take steps to increase labor force participation, including improving child-care and other family-friendly benefits to draw more women into the workforce, pursuing immigration reforms and reworking the disability insurance program to allow for recipients to do part-time work.

It also called for the United States to raise the federal minimum wage while at the same time providing a more generous earned-income tax credit, and improving early childhood education.