IMF Cuts US Growth Forecast for 2014 to 2%

The International Monetary Fund (IMF), which in April penciled-in growth of 2.8% for the US economy in 2014, said that it now expects the figure to be only 2% and the Federal Reserve may have scope to keep interest rates at zero for longer than investors expect.

The Washington-based IMF announced that “momentum faded in the US economy” early this year as a severe and prolonged winter “conspired with other factors” such as a drawdown in inventories, a sluggish housing market and slower demand.

While a rebound is underway from the resulting contraction in the first quarter, it is providing “only a partial offset” to the weakness experienced in Q1.

The IMF added that it still expects US growth to accelerate in 2015 to 3%, but doesn’t expect a return to full employment until the end of 2017, amid low inflation.

However, further ahead it anticipates longer-run potential growth averaging only around 2% for several years, below historical averages. A year ago, the IMF was projecting potential growth rates of 2.3% for 2015-16 and 2.4% in 2017-18.

For the Federal Reserve, the downwards revisions mean that “policy rates could afford to stay at zero for longer than the mid-2015 date currently foreseen by markets.”

The IMF also backed president Obama’s efforts to raise the US minimum wage level to US$10.10 per hour from the current level of US$7.25. In April, US Senate Republicans blocked the legislation.

The report urged the implementation of more proactive labour market policies, which included strengthening the Earned Income Tax Credit (EITC) in addition to a higher minimum wage.

“This would help raise incomes for millions of working poor and would have strong complementarities with the suggested improvements in the EITC,” it stated.

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