The global crisis lender also warned of hazards on the horizon, especially the continued trade tensions with China and other countries, as well as mounting corporate debts as well as a delicate task facing the central bank in coming months.
In the latest World Economic Outlook, the IMF portrayed the United States as an exception to the current slowing trend among rich nations—with strong consumer demand, robust labor markets and higher industrial output than its rivals.
The world’s largest economy is now expected to expand at a 2.3 per cent clip this year, down from the 2.5 per cent expected in January, but still relatively strong, according to the report released ahead of this week’s spring meetings of the IMF and World Bank.
US growth is projected to slow further to 1.9 per cent in 2020, slightly higher than forecast in January, boosted by the Federal Reserve’s policy shift, after it signaled it will not raise interest rates for the foreseeable future.
And, the IMF said, “Despite the downward revision, the projected pace of expansion for 2019 is above the US economy’s estimated potential growth rate.”
But the stimulus felt last year from the US tax cuts is fading, while the extended government shutdown also took a bite out of growth in 2019.
The IMF outlook assumes that the current truce in the US-China trade war will persist and lead to a more permanent agreement. But if the dispute flares up or spreads to autos, that could erode business sentiment and slow growth, the report warned.
As US domestic demand continues to support higher imports and the budget deficit balloons, the trade deficit could swell further “which could aggravate trade tensions,” the report said.
Rising corporate debt
The IMF also warned that corporate debt was increasingly risky, with bond investors and others lending to a growing number of low-rated issuers or borrowers who offered little protection in the event of a default.
“If US growth were to weaken, such financial fragilities could amplify and prolong the slowdown,” the IMF cautioned.
That would leave companies to choke on burdensome debt payments and suffer credit downgrades, forcing them to slash spending as a result.
The Federal Reserve, which has said it does not expect to raise interest rates again in 2019, could nevertheless feel compelled to do so in the second half of the year as wage growth accelerates and the shortage of workers continues, the report said.
The Fed could face a difficult policy challenge: Raising borrowing costs could erode business activity and growth, but delaying a rate hike in the face of inflation pressures “could contribute to financial vulnerabilities and a sharper downturn down the road.”
And what happens in the US economy feeds through to the broader global economy. — AFP
Source: The Malay Mail Online