US faces 'narrowing path' to avoid recession: IMF chief

The US is facing an increased risk of a downturn, says IMF managing director Kristalina Georgieva. PHOTO: AFP

WASHINGTON (AFP) - With inflation rising sharply, and the Federal Reserve raising interest rates, the United States is facing an increased risk of a downturn, IMF managing director Kristalina Georgieva said on Friday (June 24).

The world's largest economy rebounded strongly from the pandemic downturn, but with the "unwelcome side effects" of rising prices, she said.

While the IMF is confident the Fed's rate hikes will bring down inflation, "We are conscious that there is a narrowing path to avoiding a recession," she said in a statement.

The Fed last week implemented the biggest increase in its benchmark lending rate in nearly 30 years, as part of its aggressive effort to quell inflation that is at a four-decade high and squeezing American families struggling with rising prices for gasoline, food and housing.

The economy already was seeing strong demand clashing with supply snarls due to pandemic lockdowns in China and elsewhere, and the war in Ukraine has intensified the inflationary pressures.

The Washington-based crisis lender in its annual review of the US economy slashed its growth forecast again to 2.9 per cent, from the 3.7 per cent forecast in April.

For 2023, growth is expected to slow to 1.7 per cent, but "narrowly avoid" a recession, according to the report, known as the Article IV consultation.

Georgieva said it is important to recognise the "uncertainty" surrounding the current situation.

"The economy continues to recover from the pandemic and important shocks are buffeting the economy from the Russian invasion of Ukraine and from lockdowns in China," she said. "Further negative shocks would inevitably make the situation more difficult."

Georgieva met with US Treasury Secretary Janet Yellen and Fed chairman Jerome Powell and the officials "left no doubt as to their commitment to bring inflation back down" as a "critical ingredient to boosting household incomes and ensuring strong and sustained growth."

She agreed that getting the benchmark interest rate quickly up to 3.5-4 per cent "is the correct policy."

Roll back tariffs

She also urged Washington to remove punitive trade duties imposed under former president Donald Trump - something President Joe Biden said he is considering and Yellen appears to favour.

"Especially at a time when inflation is high and supply chains are strained... we can see clear benefits in rolling back the tariffs that were introduced over the last five years," Georgieva said in a statement.

However, the US Trade Representative has said the steep tariffs on China offer negotiating "leverage" with Beijing which she is reluctant to give up.

The IMF report said removing tariffs on steel, aluminum, and a range of products from China "would support growth and help reduce inflation."

The rapid US recovery, helped by low interest rates and hefty government aid, had domestic benefits, reducing poverty and creating more than 8.5 million jobs since the end of 2020, according to the IMF analysis.

It also offered a boost to the pandemic-ravaged global economy, but fund economists cautioned that it will be "tricky" to avoid recession.

"The stakes are clearly high. Misjudging the policy mix - in either direction - will result in sizable economic costs at home and negative outward spillovers to the global economy."

However, the report pushed back against comparisons to the inflationary era of the 1980s, noting the economy and the central bank actions are "markedly different."

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