| Christine Lagarde, IMF chief, Washington DC press confeence, June 16, 2014|
The International Monetary Fund (IMF) in
a statement on
the conclusion of an
annual review of the US economy that was issued Monday, cut its forecast of
economic growth in 2014 and it said inflation will remain below the Federal
Reserve's 2% target through 2017. It recommends the central bank should keep its
policy rate near zero even longer than investors now expect.
The IMF cut its forecast for US economic growth by 0.8 percentage point to 2%,
citing a harsh winter, a struggling housing market and weak international demand
for the country's products.
Every year since the recession ended in mid-2009, new year optimism on the
recovery has faded as the year progressed and this year is no different -
our report Monday on the impact of debt in the US and Europe.
The add to the gloom this year,
the Fund says in respect of coming years:
Potential growth is forecast to average around 2% for the next several
years, below both historic averages and the outlook assessed at the last Article
IV consultation. A combination of factors is at work in lowering longer-run
growth including the effects of population aging and more modest prospects for
productivity growth. This puts a significant premium on taking immediate steps
to raise productivity, encourage innovation, augment human and physical capital,
and increase labor force participation. Such measures should involve investments
in infrastructure and education, improving the tax system, and active labor
market policies. They may also include reaching agreement on a broad,
skills-based approach to immigration reform (to expand the labor force, raise
average labor productivity, and support medium-term fiscal adjustment) as well
as fully capitalizing on the gains from rising U.S. energy independence while
protecting the environment (including by removing existing restrictions on U.S.
oil exports). No single measure will be sufficient and a manifold solution will
certainly be required. There is no shortage of good ideas currently under public
debate and so the challenge ahead is to forge political agreement on specific
The US economy grew an average inflation-adjusted
3% between 1948 and 2007.
At a press conference,
Christine Lagarde, managing director, supported the Obama
administration call for a rise in the minimum wage, a higher earned income tax
credit (EITC) and more spending on infrastructure.
“We recommend an expansion of the earned income
tax credit. It’s a programme that works and has been around for the last 40
years,” Lagarde said. The credit gives a tax refund mainly to working low-income
families with children.
“To complement the expansion of the EITC we also
argue for an increase in the minimum wage which, in the US, relative to median
wages is among the lowest in advanced economies, 38%. So two key measures,
expansion of the EITC coupled with an increase in the minimum wage.,” Lagarde
said, adding that the US level was among the lowest in rich countries, relative
to median wages.