IMF lowers outlook for US economy while warning of slow inflation

FILE – Kristalina Georgieva, managing director of the International Monetary Fund, walks to the podium during the 2022 annual meeting of the International Monetary Fund and the World Bank Group on Oct. 14, 2022, in Washington. Heads of state, financial leaders and activists from around the world will gather in Paris this week to seek ways to overhaul the world’s development banks, such as the International Monetary Fund and the World Bank. /Manuel Pals Seneta, file)

The International Monetary Fund (IMF) on Tuesday cut its 2024 outlook for the US economy by 0.1 percentage points to an expected annual growth of 2.6 percent.

It kept its global outlook steady at 3.2 percent growth for the year, while raising 2025 expectations to 3.3 percent from 3.2 percent as forecast in April.

The international lender kept its 2025 projection for the U.S. economy steady at 1.9 percent, expecting job conditions to weaken next year and Congress to begin making spending cuts.

„As the labor market cools and consumption moderates, with growth expected to slow to 1.9 percent in 2025, fiscal policy begins to gradually tighten,” IMF economists wrote in a July update to the World Economic Outlook.

The Federal Reserve expects relatively weak employment next year, with the unemployment rate rising to 4.2 percent from the current 4.1 percent, according to the central bank’s latest summary of economic projections.

Federal Reserve Chairman Jerome Powell told Congress this month that U.S. central bankers are not simply concerned with getting inflation under control, but that they are now focusing on heightened sensitivity to labor conditions as the ratio of jobs available to job seekers has come up. Way down.

The US Consumer Price Index (CPI) depreciated for the first time since the pandemic in June, down 0.1 percent from May. CPI fell to a 3 percent annual increase in June, the first time since March 2021 that it fell below 3 percent.

Despite recent downward trends in prices, the IMF warned of slowing global inflation, calling for higher-than-average inflation in services sectors.

„Nominal wage growth has been brisk, outpacing price inflation in some countries, reflecting the conclusion of wage negotiations earlier this year and short-term inflation expectations above target,” IMF economists wrote.

Earlier profit margins from the pandemic recovery were replaced by increased employment costs in early 2024 as compensation increased as non-labor cost margins fell in the first quarter of the year. Annual wage growth has outpaced inflation since May last year, although both are slowing.

Increased nominal wage growth, combined with lower productivity, will make it harder for firms to control their price increases, especially when profit margins are tight, the IMF noted.

Funds warned of additional price pressures from protectionist economic policies and renewed trade disputes, a possible reference to new China-focused tariffs by the Biden administration, along with suggestions from the Trump campaign to impose general tariffs if he wins the presidential election in November. .

Economists at another United Nations economic agency, the Conference on Trade and Development (UNCTAD), issued a similar warning this month, citing the potential for a resurgence in restrictive trade policies and domestically focused manufacturing agendas.

„The use of trade restrictive measures and inward-looking industrial policies are expected to have a negative impact on the growth of international trade, particularly in some strategic sectors,” UNCTAD economists wrote.

Both companies warned of the effect that higher interest rates could have on the strength of the dollar, affecting trade dynamics and capital flows between countries.

UNCTAD economists sounded a more positive note than the IMF in their July global trade update on fading global inflation and prospects for US interest rate cuts.

„Controlling global inflation and improving economic growth suggest a reversal of the downward macroeconomic trends that have dominated most of 2023,” they wrote, adding that rate cuts would „undervalue the dollar, stimulate prices and international trade volumes.”