Still under the impact of a harsh winter, the International Monetary Fund (IMF) estimates that the U.S. economy will grow no more than 2% over 2014. The organization’s previous estimate was 2.7%.
This latest report, released Monday, even downgrades forecasts for the Federal Reserve, and highlights structural weaknesses in the largest economy in the world due to a weak labor market, the impact of poverty, fiscal policy and poor infrastructure reform.
At its last meeting, the Fed left its GDP forecast at 2.9% for this year, which now seems to be much too high when compared to the one given by the IMF today. However, the cooling economy, may still see worse economic growth forecasts as it is expected that after this week’s meeting of the U.S. FED that projection will be lowered to 2.25%.
According to the IMF, once the weather improves there will be “a significant spike” in activity. Thus, the growth could reach 3% in 2015, roughly in line with what has been indicated by the FED, however, the IMF, which is headed by Christine Lagarde, stated in its assessment that the report echoes the policies of President Barack Obama and the Republican filibuster in Congress, which according to the IMF is what is preventing the country from having a better outlook.
In their opinion, the IMF said, ahead of a long-term improvement, the U.S. has to address five issues of great significance: increase productivity and labor participation, poverty reduction, maintaining public debt in a downward trajectory, ending the below zero interest rates policy and a safer financial system.
The growth forecast indicates that as the economy takes hold, the current account deficit will increase slowly, while intensifying import demand will be offset only in part by fiscal consolidation and improvements in the trade balance.
Although employment growth has proceeded at “a healthy pace,” the labor market is weaker indicating the overall unemployment rate of 6.3%. Thus, long-term unemployment is high, the share of the labor force is well below what could be explained by demographic factors and wages are stagnant.
The aging population and modest prospects for improved productivity that hinder GDP growth go further. The IMF said the United States should encourage innovation and increase participation in the workforce.
But in front of all of these improvement there is still the scourge of poverty. Recent data indicate that 50 million Americans live in poverty, a rate that remains above 15% despite the so-called economic recovery. The report Indicates that there has been a slight improvement in employment, but notes that, ultimately, health reform driven by Obama will make a major contribution to reducing this problem. This viewpoint seems to contradict preliminary results on the ground, as more people have been laid off or have lost their jobs partially or completely because of the high costs imbedded in Obamacare.
The IMF report also indicates that the US must follow its current policy of incentives, while there is still a risk in financial stability. In recent years, the US has adopted a series of protective measures, it says. It further suggests that it is necessary to create and maintain financing for housing. “The limited availability of mortgage financing persistently slows economic growth,” it says.
Another advice is a political agreement on long-term fiscal policy. “Its absence creates uncertainty”. It is necessary to change the tax system,” the report says. But spending must occur in infrastructure “urgently needed additional investment to upgrade the quality of infrastructure, particularly in road transport.”