IMF cuts US growth outlook and calls for minimum wage hike

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The International Money Fund has cut its growth forecast for the United States economy this year to 2 per cent and said the Federal Reserve could have the option of leaving its policy interest rates at zero for longer than markets are expecting.

In its annual review of the US economy, the IMF also urged the United States to raise its minimum wage, which it said is below international standards, to help lift almost 50 million Americans out of poverty.

The IMF had previously forecast growth of 2.8 per cent this year for the world’s biggest economy.

But in its review, the fund said momentum had faded in the US economy “as a harsh winter conspired with other factors – including inventory drawdown, a still-struggling housing market, and slower external demand” – to slow down growth.

“Recent data, however, suggest a meaningful rebound in activity is now underway and growth for the remainder of this year and 2015 should well exceed potential,” the IMF said.

“This renewed dynamism, however, provides only a partial offset to the weak first quarter and so growth is now projected at 2 per cent for 2014, rising to 3 per cent in 2015.”

The IMF said the US economy would not achieve full employment until the end of 2017.

“Given the substantial economic slack in the economy, there is a strong case to provide continued policy support,” the fund’s economists wrote.

“Under the staff’s baseline, the economy is expected to reach full employment only by end-2017 and inflationary pressures are expected to remain muted. If true, policy rates could afford to stay at zero for longer than the mid-2015 date currently foreseen by markets.”

In an interview on Bloomberg Radio, IMF managing director Christine Lagarde said: “We do not think it will be a downward spiral (for the US economy). However we have revised our growth trend.”

Asked if the United States was still a locomotive for the global economy, she replied: “Yes.”

The IMF said it forecast potential US economic growth to average around 2 per cent for the next several years, which is “below historic averages”. It cited the effects of an aging population and more modest prospects for productivity growth as reasons.