IMF slashes U.S. growth forecast, sees ‘narrowing path’ to avoid recession

IMF slashes U.S. growth forecast, sees ‘narrowing path’ to avoid recession

© Reuters. People drive outside the Lincoln Tunnel at the start of the Memorial Day weekend, under rising gas prices and record inflation, in Newport, New Jersey, U.S., May 27, 2022. REUTERS/Eduardo Munoz

By David Lawder and Andrea Shalal

WASHINGTON (Reuters) – The International Monetary Fund on Friday slashed its U.S. economic growth forecast due to more aggressive Federal Reserve interest rate hikes but predicted that the United States would “narrowly” avoid a recession.

In an annual assessment of U.S. economic policies, the IMF said it now expects U.S. GDP to grow 2.9% in 2022, compared with its most recent forecast of 3.7% in April. For 2023, the IMF cut its U.S. growth forecast to 1.7% from 2.3% and it now expects growth to trough at 0.8% in 2024.

Last October, before the COVID-19 wave fueled by the Omicron variant and well before Russia’s invasion of Ukraine caused a sharp spike in fuel and food prices, the IMF predicted 5.2% U.S. growth in 2022.

“We are conscious that there is a narrowing path to avoiding a recession in the U.S.,” IMF Managing Director Kristalina Georgieva said in a statement, noting that the outlook had a high degree of uncertainty.

“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 said her discussions with U.S. Treasury Secretary Janet Yellen and Fed Chair Jerome Powell “left no doubt as to their commitment to bring inflation back down.”

U.S. inflation by the Fed’s preferred measure is running at more than three times the U.S. central bank’s 2% target.

Georgieva said the responsibility to restore low and stable inflation rests with the Fed, and that the Fund views the U.S. central bank’s desire to quickly bring its benchmark overnight interest rate up to the 3.5%-4% level as “the correct policy to bring down inflation.” The Fed’s policy rate is currently in a range of 1.50% to 1.75%.

“We believe this policy path should create an up-front tightening of financial conditions which will quickly bring inflation back to target. We also support the Fed’s decision to reduce its balance sheet,” she said.

Georgieva said the IMF strongly supported U.S. President Joe Biden’s proposed $1.9 trillion “Build Back Better” spending package of climate and social spending because it would help reshape the U.S. economy by increasing labor force participation, reducing supply constraints and incentivizing investment and innovation. Lack of support in Congress “represents a missed opportunity,” she said

She also signaled that the IMF would support a scaled-down version of this agenda, saying: “We think the administration should continue making the case for changes to tax, spending, and immigration policy that would help create jobs, increase supply and support the poor.”

Georgieva also said the IMF sees clear benefits to rolling back the U.S. import tariffs that were imposed over the last five years, which include punitive duties on Chinese imports and global tariffs on steel, aluminum, washing machines and solar panels.

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