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IMF cuts US growth forecasts, cites Trump fiscal plan uncertainty

28 June 2017

The International Monetary Fund on Tuesday cut its growth forecasts for the US economy to 2.1 percent for both 2017 and 2018, dropping its assumption that President Donald Trump's tax cut and fiscal spending plans would boost growth.

The IMF cut its forecast for USA economic growth for this year to 2.1% from a previous estimate of 2.3%.

The IMF reduced its forecast for U.S. growth this year to 2.1%, from 2.3% in the fund's April update to its world economic outlook.

Trump's budget for the fiscal year ending in 2018 assumes the economy will grow by 2.9 per cent on average in the coming decade, but the IMF's central forecast says this is unlikely to be achieved in the absence of a clear plan.

While the Donald Trump administration proposed reduction of fiscal deficit and debt, reprioritization of public spending and revamp of the tax system, "it became evident that many details about these plans are still undecided", the International Monetary Fund said in a statement after concluding the Article IV consultations with USA authorities, an annual check-up of economic and financial policies between the International Monetary Fund and its member countries.

The IMF criticised the White House because of its "still evolving policy plans", and the presumable positive effects of Trump's fiscal stimulus have therefore been removed from the Fund's assessments of the United States economic prospects.

The IMF in January raised the estimates on the expectation of fiscal stimulus from the Trump administration, but have reverted back to the previous calculations - which project the economy will expand by 2.1 percent in 2017 and 2018, down from 2.3 percent and 2.5 percent, respectively.

"The US is effectively at full employment", the lender said.

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"Alongside the ongoing normalization in policy rates, it is appropriate that the Federal Reserve looks to unwind the post-crisis increase in its holdings of treasury and mortgage backed securities", the International Monetary Fund said, noting continued clear communication would help the central bank smoothly shrink its balance sheet and avoid undue market volatility.

"Looking at the USA data, it is unlikely that these set of policies can generate an acceleration of economic growth of a magnitude of let's say approximately 1 percentage point".

The US is enjoying its third longest economic expansion since 1850.

Instead, the fund forecasts the growth rate will steadily fall over the next five years to around 1.7%, assuming no major policy changes.

The US dollar's overvaluation, which the Fund pegged at between 10% and 20%, would also be reduced as a result, with positive "spill-over" effects on other countries.

The organisation said it supported ideas such as tax reform, family leave policies and investment in infrastructure as a way to boost growth.

"The US economic model is not working as well as it could in generating broadly shared income growth", Werner said during a press conference.

IMF cuts US growth forecasts, cites Trump fiscal plan uncertainty