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The US faces growing economic “headwinds” and “pernicious” trends including a shrinking middle class that could slow growth in the long term, the International Monetary Fund has warned.
In a statement marking the end of their annual mission to assess the US economy, IMF economists declared it was in “good shape”, citing 2.4m new jobs created in the past year and declaring that slowing growth in recent quarters had been a temporary setback it was likely to overcome. The Fund predicted US GDP would grow 2.2 per cent this year, down from 2.4 per cent in 2015.
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But the IMF offered a much more sobering view of the economy the next president will inherit, warning that recent weak employment and other data may reflect the economy’s lower potential growth rate and daunting longer term trends.
Christine Lagarde, the IMF’s managing director, said the US economy was facing four forces “that pose a challenge to future growth”. Those, she said, were the declining labour force participation rate, declining productivity, increasing polarisation in income distribution and a high share of the US population still living in poverty.
“All in all, our assessment is that, if left unchecked, these four forces . . . will corrode the underpinnings of growth (both potential and actual) and hold back gains in US living standards,” she said in prepared remarks.
The IMF endorsed the Federal Reserve’s cautious approach to monetary policy. “At this point in the cycle, there is a clear case to proceed along a very gradual upward path for the fed funds rate,” IMF economists wrote.
The Fund stayed clear of US politics and a presidential campaign that has seen the economy and issues like trade feature heavily. It offered only a recommendation that the US “resist all forms of protectionism” in what some might see as a thinly veiled rebuke of Donald Trump, the presumptive Republican presidential nominee, who has pledged to impose punitive tariffs on imports from China.
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In their report IMF economists pointed to the US’s “crumbling” infrastructure and “growing headwinds [that] are overlaid by pernicious secular trends in income”.
Labour’s share of US income was around 5 per cent lower today than it was 15 years ago, they said, while the middle class had shrunk to its smallest size in the past 30 years.
All of the forces now buffeting the US economy were also linked and reinforcing each other, they said.
Demographic changes were slowing the US’s potential growth and that in turn was affecting things like business investment and leading to a less dynamic labour force. Similarly, “reduced dynamism in the corporate sector has the potential to diminish innovation, deepen the loss of middle income jobs, and further polarise the income distribution,” the IMF economists wrote.
“The causes of and interactions between these various forces are complex and not well understood. However, what is clear is that these trends are coinciding with a well-documented decline in potential growth (from above 3 per cent in the early 2000s to below 2 per cent today) that is being mirrored across a range of advanced and emerging economies,” they said.
“If left unchecked, these forces will continue to drag down both potential and actual growth, diminish gains in living standards, and worsen poverty.”
