The International Monetary Fund slashed its forecast for US economic growth on Monday, citing a harsh winter, problems in the housing market and weak international demand for the country's products.
In its annual review of the US economy, the IMF cut its growth forecast by 0.8 percentage points to 2%. At a press conference IMF managing director Christine Lagarde blamed the bad winter for much of the cut and said the setback should be temporary. But she warned: “Growth in and of itself will not be enough.”
As part of a series of reforms the IMF has called for an increase in the minimum wages in the US, currently the lowest when compared to the average wage in any of the Organisation for Economic Co-operation and Development (OECD)’s 34 countries.
She said the number of long-term unemployed, 3.4 million in May according to the Department of Labor, remained too high and the percentage of people in or actively looking for work, the so-called participation rate, remained too low.
“We believe that a rise in the minimum wage would be helpful,” she said, especially if complemented with tax policies to help low-wage earners. “We are talking about significant numbers when you have 50 million living below poverty, many of whom are working. That’s why we are recommending it,” she said.
The IMF’s latest report into the health of the US economy does predict a meaningful economic recovery. Growth is expected to hit 3% next year. Lagarde said this was the first time in recent years that the report was being compiled at a time when the US was not in the midst of a major political or financial crisis.
While the impact of this winter’s frigid temperatures was now dissipating, Lagarde warned that extreme weather events were becoming more frequent and had an outsized impact on the economy. “I think that’s a valid reason to worry about climate change and how to deal with it,” she said.
The IMF believes the US also needs to do more to mitigate the impact of its ageing population and to stimulate productivity. The best option would be for government to boost spending, notably on infrastructure, the IMF said. "But, regrettably, political agreement on such an approach remains elusive," the fund said.
The IMF also warned that while financial markets appeared relatively stable, the long period of low interest rates had increased the chances of a new financial crisis emerging.
“Over the past few years, much has been done to reduce financial system risks: the banks are stronger, corporate balance sheets are healthy, overall leverage is contained, and the regulatory framework has been greatly improved. Nevertheless, the prolonged period of very low interest rates continues to raise financial stability concerns, particularly related to activities in the so-called ‘shadow’ banks and in other non-bank intermediaries including,” the IMF said in its report.
Fragmented oversight of these nonbank financial entities and the volume of business they deal with present a potential threat to the stability of the markets, said the IMF.
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