(Washington) The United States is on a “narrow path” to avoid a recession in the face of inflation and rising interest rates, IMF chief Kristalina Georgieva said on Friday, as the institution cut its growth projections for the world’s largest economy.
Posted at 5:15 p.m.
The International Monetary Fund (IMF) now projects a 2.9% expansion for US gross domestic product in 2022, down from 3.7% projected in April. For 2023, growth falls to 1.7%, according to these new IMF projections in its annual review of the US economy (Article IV).
“We expect the US economy to slow in 2022-23, but narrowly avoid a recession,” the IMF says.
But “there remain risks that the current headwinds will prove more persistent than expected or that the economy will suffer another shock that would then turn this slowdown into a brief recession,” he adds.
“The expected slowdown in U.S. demand, combined with the necessary tightening of financial conditions around the world, has the potential to negatively impact individuals, businesses and countries that have borrowed in dollars,” acknowledges the institution. .
However, the Fund welcomes the monetary policy of the American Central Bank (Fed), which radically raised its key rates and began to reduce its balance sheet, inflated billions of dollars of asset purchases during the slowdown due to the pandemic.
“The priority now is to quickly slow wage and price growth without pushing the economy into recession,” says the IMF.
The Fed needs to better telegraph its intentions
The Fed raised rates by 75 basis points at its most recent monetary meeting, its biggest hike in nearly 30 years, and the Fund estimates that “this path leading to a level of 3.5% to 4% of the federal funds is the right policy to bring down inflation”.
Fed overnight rates are currently in the range of 1.5% and 1.75% from zero at the start of the year.
The IMF also invites the US Central Bank to better communicate its plans for rate changes, while the most recent increase, stronger than expected, had come as a surprise to the markets.
“The Monetary Committee (FOMC) must telegraph well in advance the expected evolution of its monetary policy to ensure that the withdrawal of the accommodative policy is done in an orderly, methodical and transparent manner”, further advises the IMF.
Mme Georgieva, managing director of the Fund, also urged Washington to remove customs duties – imposed in particular on products coming from China five years ago – to “boost economic performance and ease supply constraints”.
“At a time of high inflation and strained supply chains […]we can see clear benefits from suspending tariffs that have been introduced over the past five years,” said Mr.me Georgieva at a press conference.
Nevertheless, the US Trade Representative recently said that high tariffs on China offered a “leverage” in negotiations with Beijing that she was reluctant to give up.
The IMF report indicates that the removal of customs duties on steel, aluminum and a range of products from China “would support growth and help reduce inflation”.
After the COVID-19 pandemic, the rapid recovery of the world’s largest economy, helped so far by low interest rates and massive government aid, reduced poverty from 11.8% in 2019 to 9.1% in 2020. More than 8.5 million jobs since the end of 2020.