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News : US Economy Last Updated: Jun 18, 2014 - 11:07 AM

IMF cuts US growth forecast for 2014 - another year of disappointment
By Finfacts Team
Jun 17, 2014 - 2:20 AM

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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 - read 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 legislation."

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.

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