Bloomberg News

IMF Trims U.S. Growth Outlook in Draft Report Citing Fiscal Cuts

April 12, 2013

IMF Trims U.S. Growth Outlook in Draft Report Citing Fiscal Cuts

U.S. gross domestic product will expand 1.7 percent this year compared with a previously forecast 2 percent advance, according to the draft report obtained by Bloomberg News. Photographer: David Paul Morris/Bloomberg

The International Monetary Fund lowered its forecast for U.S. growth as automatic budget cuts slow the expansion, according to a draft of the Washington-based lender’s World Economic Outlook.

U.S. gross domestic product will expand 1.7 percent this year compared with a previously forecast 2 percent advance, according to the draft report obtained by Bloomberg News. The draft, which was presented to the IMF board last week, may be subject to revisions before its scheduled April 16 release.

The U.S.’s fiscal tightening that took effect last month will restrain consumption temporarily, the report said. The global economy will expand 3.4 percent this year, compared with 3.5 percent forecast in January, according to projections in the report. The 17-nation euro area will contract 0.2 percent, unchanged from January, with uncertainty stemming from Italy’s election adding to challenges facing policy makers fighting Europe’s debt crisis, it said.

“The road to recovery in the advanced economies will remain bumpy,” the draft report said. “The weak ending to economic activity in 2012 and the sluggish beginning in 2013 highlight that important brakes remain in place.”

IMF spokeswoman Conny Lotze, in an e-mail reply to a question about the draft, declined to comment.

The report said that two of the biggest threats to the global economy -- a euro-area break-up and a sharp fiscal contraction in the U.S. -- have been “successfully defused” over the past six months.

Japan’s Prospects

In Japan, the pace of growth this year is forecast to reach 1.5 percent, up from the IMF’s outlook in January for a 1.2 percent expansion, the draft report shows.

Read: Why Value Funds Are Dabbling in Japan

The report also downplayed concerns that looser monetary conditions in some countries hurts others.

“Complaints about competitive exchange-rate depreciations appear overblown,” according to the draft report. “At this juncture, there seem to be no major deviations of the main currencies from medium-term fundamentals.”

The draft report said the U.S. dollar and euro “appear moderately overvalued” and China’s yuan “moderately undervalued.” It said the evidence on the yen’s value is “mixed.”

The document echoes comments two days ago by IMF Managing Director Christine Lagarde, who warned that the U.S. budget impasse will prevent the world economy from gaining much traction this year.

‘Blunt Instrument’

“This risks throwing away needed growth, especially at a time when too many people are still out of work,” Lagarde said in a speech in New York. “It is also an extremely blunt instrument, imposing deep cuts in many vital programs -- including those that help the most vulnerable -- while leaving untouched the key drivers of long-term spending.”

President Barack Obama earlier this week sent a $3.77 trillion budget to Congress calling for more tax revenue and slower growth for Social Security benefits to replace across- the-board spending cuts.

Meanwhile, growth in emerging markets, especially smaller countries, is picking up steam, according to the draft report. That should help prop up global growth next year, which the IMF sees rising to 4.1 percent, unchanged from its January forecast.

While most developing economies, especially in Asia and sub-Saharan Africa, are experiencing faster growth as demand from rich nations strengthens, a few economies in Latin America are “slipping into crisis-like conditions,” the IMF said.

To contact the reporter on this story: Joshua Goodman in Rio de Janeiro at jgoodman19@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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