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IMF slashes U.S. outlook, but sees better 2015

People shop at The Grove mall in Los Angeles on November 26, 2013.

LUCY NICHOLSON/REUTERS

The International Monetary Fund slashed its outlook for U.S. economic growth this year, the latest reminder of the toll an unusually difficult winter took on the country's recovery.

The IMF on Wednesday predicted sunnier days ahead, especially in 2015, but the damage to 2014 appears to be done.

In April, before the full effect of the winter's snowstorms and freezing temperatures had become clear, the Washington-based IMF predicted gross domestic product in the United States would expand 2.8 per cent in 2014. That would have been a relatively strong showing. The updated forecast, released Wednesday, is 1.7 per cent, which would be the weakest growth rate since GDP contracted in 2009.

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The IMF's revised outlook for U.S. growth this year aligns with the Bank of Canada's updated forecast of 1.6 per cent.

Both institutions expressed disillusionment with America's star-crossed recovery, and hope that the second half of 2014 and 2015 brings a strong and steady expansion that could finally make the financial crisis a memory. The IMF sees economic growth of 3 per cent in 2015 and 2016, which would be the fastest since 2005. The Bank of Canada predicts a similar growth rate for the U.S. over the next couple of years.

"We do see a more optimistic view for the economy going forward," Nigel Chalk, deputy director of the IMF's Western Hemisphere division, said on a conference call with reporters.

However, Mr. Chalk said the IMF differs with more optimistic forecasters in that it doubts the shock to economic activity in the first quarter was made up in the months that followed.

"We're not going to see an acceleration of growth in the second quarter," he said. "We don't see pent-up demand."

The IMF's outlook reinforces the case for leaving interest rates low in the U.S. for a considerable time yet. In fact, the fund in its annual review of the U.S. economy says the Fed should consider leaving its benchmark lending rate pinned at zero for longer than the mid-2015 liftoff that it appears to currently have planned.

"The economy is expected to reach full employment slowly and inflation pressures are forecast to remain muted," the IMF said in its report.

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"This could mean that – presuming systemic financial stability risks are contained – there is some scope for policy rates to stay at zero for longer while keeping inflation under 2 per cent," which is the Fed's target.

The U.S. is Canada's biggest trading partner by a wide margin, making the health of its economy critical to Canadian prosperity. That's truer today than it has been in years because Canada's domestic demand has become constrained by years of borrowing at ultralow interest rates to buy houses, a spending spree that offset weak international demand for Canadian goods, but has left households severely indebted.

The Bank of Canada reiterated last week that faster economic growth in Canada "hinges" on exports and business investment.

Besides the harsh winter, the U.S. economy in the first quarter suffered from a big drop in exports and stockpiling that won't be recovered, the IMF said. The fund also expressed concern about the levelling off of the housing market and lacklustre business investment.

The latter should reverse as prospects for the economy brighten because the average age of non-residential capital stock is at a 40-year high, the IMF said. Americans also have pared debt considerably, and thanks to the rebound in house prices and surging stock prices, net worth as a share of disposable income is back at pre-crisis levels, the IMF said. That should support consumer demand at home, and for goods made abroad.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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