IMF Forecasts Robust US Economic Growth, But Warns Of Rising Government Debt

date_range 11-Oct-2023
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The 2018 World Economic Outlook from the IMF paints a positive image of the US economy, with solid growth and a healthy labor market, indicating a greater chance of a "soft landing" scenario in which inflation falls in tandem with a moderate output slowdown.

However, the IMF's flagship report also issues a warning about US fiscal policy and rising government debt.

The Washington-based agency emphasizes that the United States has experienced the most significant recovery among major economies, with GDP in 2023 anticipated to exceed pre-pandemic levels.

According to the IMF's new projections, the United States' economic growth for 2023 is now expected to be 2.1%, a 0.3 percentage point increase from earlier July estimates. Furthermore, the IMF predicts 1.5% growth in 2024, up 0.5 percentage point from prior projections.

Growth forecasts in other parts of the world have slowed, emphasizing the United States' extraordinary economic performance.

Notably, the eurozone's growth prediction has been cut by 0.2 percentage point to 0.7% in 2023 and 0.3 percentage point to 1.2% in 2024. Germany is the only advanced economy anticipated to have a recession in 2023, with output expected to fall by 0.5%.Similarly, China's economic growth has been cut by 0.2 percentage point to 5% in 2023 and 0.3 percentage point to 4.2% in 2024.

Unemployment Remains Under Control: The IMF's report on unemployment in the United States brings reassurance. The increase in unemployment is expected to be moderate, growing from 3.6% to 3.9% by 2025, highlighting the job market's resiliency in the future years.

Inflationary Pressures in the United States: Inflationary pressures in the United States are likely to ease. According to the IMF, inflation will fall to 3% by the end of 2023 and then to 2.6% by the end of 2024.

Fiscal Policy Raises Concerns: One major concern raised in the IMF study is the United States' fiscal policy posture. According to the report, fiscal conditions have deteriorated significantly. The IMF emphasizes that fiscal policy in the United States should not be procyclical, especially at this point in the inflation cycle.

The budget deficit in the United States is predicted to fall just little, from 8.2% in 2023 to 7.4% in 2024 and eventually to 7% by 2028. This pattern suggests that fiscal issues will endure in the next years.

Rising Government Debt: The IMF forecasts an increase in US government debt as a result of the expansionary fiscal policies.The federal government's debt is predicted to rise from 123.3% of GDP in 2023 to 126.9% in 2024, and eventually to 137.5% by 2028.

Bond yields will remain higher for a longer period of time: The 10-year US government bond yield, a key indicator for investors, is expected to average 3.8% in 2023 and rise to 4.0% in 2024.

The 10-year Treasury yield is currently about 4.70%. In 2023, the performance of a 10-year benchmark note as monitored by the US 10 Year Note ETF (NASDAQ:UTEN) fell by 9%.