IMF Slashes US Growth Forecast, Sees ‘Narrowing Path’ to Avoid Recession

By Reuters
Reuters
Reuters
June 25, 2022 Updated: June 25, 2022

WASHINGTON—The International Monetary Fund on Friday slashed its U.S. economic growth forecast as aggressive Federal Reserve interest rate hikes cool demand but predicted that the United States would “narrowly” avoid a recession.

In an annual assessment of U.S. economic policies, the IMF said it now expects U.S. Gross Domestic Product to grow 2.9 percent in 2022, less than its most recent forecast of 3.7 percent in April.

For 2023, the IMF cut its U.S. growth forecast to 1.7 percent from 2.3 percent and it now expects growth to trough at 0.8 percent in 2024.

Last October, the IMF predicted 5.2 percent U.S. growth this year, but since then, new COVID-19 variants and stubborn supply chain disruptions have slowed recovery, while a sharp spike in fuel and food prices prompted by Ukraine’s war further stoked inflation to 40-year highs.

“We are conscious that there is a narrowing path to avoiding a recession in the U.S.,” IMF Managing Director Kristalina Georgieva told a news conference, noting that the outlook had a high degree of uncertainty.

“The economy continues to recover from the pandemic and important shocks are buffeting the economy from the Russian invasion of Ukraine and from lockdowns in China,” she said. “Further negative shocks would inevitably make the situation more difficult.”

If large enough, a shock could push the United States into a recession, but it would likely be short and shallow with a modest rise in unemployment, akin to the U.S. recession in 2001, said IMF Deputy Western Hemisphere Director Nigel Chalk. Strong U.S. savings would help support demand, he added.

Inflation Cutting “Pain”

Georgieva said price stability was important to protect U.S. incomes and sustain growth, but there may be “some pain” for consumers in achieving it.

IMF Managing Director Kristalina Georgieva
IMF Managing Director Kristalina Georgieva speaks during a conference hosted by the Vatican on economic solidarity, at the Vatican on Feb. 5, 2020. (Remo Casilli/Reuters)

She said her discussions with U.S. Treasury Secretary Janet Yellen and Fed Chair Jerome Powell “left no doubt as to their commitment to bring inflation back down.”

U.S. inflation by the Fed’s preferred measure is running at more than three times the U.S. central bank’s 2 percent target.

Georgieva said the responsibility to restore low and stable inflation rests with the Fed, and that the fund views the U.S. central bank’s desire to quickly bring its benchmark overnight interest rate up to the 3.5 percent–4 percent level as “the correct policy to bring down inflation.” The Fed’s current policy rate ranges from 1.50 percent to 1.75 percent.

“We believe this policy path should create an upfront tightening of financial conditions which will quickly bring inflation back to target. We also support the Fed’s decision to reduce its balance sheet,” she said.

By David Lawder and Andrea Shalal

Reuters