US Can Weather Impacts of Strong Dollar but IMF Cuts Growth Forecast

US Can Weather Impact of Strong Dollar, but IMF Cuts Growth Forecast

Cheap oil, tame inflation and improved household and corporate finances should offset the dollar factor.  

WASHINGTON -- The International Monetary Fund cut its outlook for U.S. economic growth this year and next on Tuesday after a sharp slowdown during the winter.

But it said the country will remain the key driver of the global economy, and weather the negative impacts of the strong dollar.

In its semi-annual World Economic Outlook, the global crisis lender trimmed half a percentage point from its forecast for U.S. growth in 2015 to 3.1%, which it branded "solid".

It also cut 0.2% from the 2016 forecast, also to 3.1%.

Just three months ago the Fund raised its prediction, expecting that a surge in hiring and consumer spending, and the plunge in oil prices, would add fuel to the country's pull away from the legacy of the 2008 financial crisis.

But a downturn through the first quarter of the year suggested continued weaknesses that have trimmed expectations for the world's largest economy.

Even so, the IMF said, the U.S. economy has remained resilient to weaker external conditions and the surging dollar.

"Consumption -- the main engine of growth --has benefited from steady job creation and income growth, lower oil prices, and improved consumer confidence."

"Conditions remain in place for robust U.S. economic performance in 2015."

The Fund's view for the U.S. economy was more optimistic than that of the Federal Reserve, which said in mid-March that growth would be at best only 2.7% this year and next.

Invest for the Future 

For the near term, the main challenge is normalizing monetary policy, the IMF said. 

Even with that, the fallout of the Federal Reserve hiking interest rates from the zero level is mainly going to impact other countries. Americans should weather the stronger dollar that could result from higher interest rates, even as it crimps exports.

Cheap oil, tame inflation, and improved household and corporate finances should offset the dollar factor.

However, the IMF said, the country faces a significant challenge of slow growth over the medium term, which signals the need for strong policy measures to invest for future growth.

"Potential growth is estimated to be only about 2%, weighed down by an aging population and weak innovation and productivity growth," it said.

The Fund said Washington needs "an ambitious agenda of supply-side policies" on top of the priorities of closing the country's budget gap and lowering its borrowing needs.

That includes, the IMF said, infrastructure investment that would have "relatively modest" costs in the near term and "important benefits" for long term output potential. 

"Building political consensus around a medium term fiscal consolidation plan and supply-side reforms to boost medium-term growth -- including simplifying the tax system, investing in infrastructure and human capital, and immigration reform -- will continue to be a challenge," it said.

Paul Handley, AFP

Copyright Agence France-Presse, 2015

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