IMF Cuts U.S. Economy Forecast -- Update

By Ian Talley Features Dow Jones Newswires

The International Monetary Fund cut its forecast for the U.S. economy Tuesday, saying it could no longer assume the Trump administration will be able to deliver pledged tax cuts and higher infrastructure spending.

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The IMF, in its annual review of the American economy, questioned the White House's plan to accelerate output and said it was skeptical the administration would be able rev up the world's largest growth engine to a sustained 3% annual rate.

That target is "an extremely optimistic growth assumption," the IMF's economists said.

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

In April, the IMF said President Donald Trump's tax-overhaul plans and spending stimulus could boost the growth rate to 2.5% next year, up from 2.3% this year. But after talks with administration officials amid still-evolving policy plans, the fund says it can no longer factor such fiscal stimulus into its forecasts. The IMF now says the economy will expand by 2.1% this year and next.

The White House and congressional leadership are still looking at a tax overhaul this year. But initial optimism about the administration's ability to get a tax revamp and infrastructure spending has faded in the face of mounting political hurdles.

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Meanwhile, buoyant stock prices, one of the longest expansions in U.S. history and a precrisis jobless rate belie an economy facing considerable challenges ahead, the fund warned.

Technology is reshaping product and labor markets, but productivity growth isn't picking up. An aging workforce is keeping a lid on labor-market expansion, a growth-sapping dynamic that may be exacerbated by more restrictive immigration policies. High government debt prevents spending-led stimulus. And a strong dollar -- estimated by the IMF to be 10% to 20% over a value economic fundamentals warrant -- is weighing on U.S. competitiveness.

"All in all, in our judgment, the U.S. economic model is not working as well as it could in generating broadly shared income growth," said Alejandro Werner, head of the IMF's Western Hemisphere department.

The Trump administration says its economic platform -- including cutting corporate and income taxes, boosting infrastructure spending and reducing regulations -- will push growth up to a sustained rate of 3% to 4% a year and cut unhealthy government debt levels.

The IMF disagreed, questioning whether the package as proposed will deliver the administration's long-term growth targets, balance the budget and cut public debt.

"Even with an ideal constellation of progrowth policies, the potential growth dividend is likely to be less than that projected in the budget and will take longer to materialize," the IMF said. International experience and U.S. history suggest a sustained acceleration in annual growth of more than 1 percentage point is unlikely, the IMF said.

The U.S. Treasury said in a statement Tuesday, "We appreciate the IMF's support of the administration's broad policy objectives, including the need to stimulate infrastructure investment, simplify the tax system, and boost educational opportunities."

The fund backs an overhaul of the U.S. tax code, cutting corporate taxes, and getting rid of exemptions. It also supports budget belt-tightening to slim the deficit and trim public debt, and boosting infrastructure spending. But the fund says the administration's plan doesn't add up.

"The consultation revealed differences on a range of policies and left open questions as to whether the administration's proposed policy strategies are best suited to achieve their intended purpose," the fund said.

To put the country's finances back on a healthy path, the IMF said, some sort of consumption tax would be necessary, such as a tax on carbon emissions or gasoline. And, it said, Mr. Trump's proposed budget cuts would disproportionately affect the poor and middle class and should be moderated.

The fund also warned against a White House plan to invoke national security to raise tariffs on steel imports, saying there was room for renegotiating trade deals such as the North American Free Trade Agreement in a way that was mutually beneficial.

"The U.S. ought to be judicious in its use of import restrictions on national security grounds and avoid measures that inadvertently weaken, rather than strengthen, the overall economy," it said.

Given the weaknesses in the economy, the fund said the Federal Reserve should aim to temporarily overshoot its 2% inflation target by gradually easing into its planned interest-rate increases.

Write to Ian Talley at ian.talley@wsj.com

(END) Dow Jones Newswires

June 27, 2017 14:57 ET (18:57 GMT)