The IMF upgraded the growth forecast for the U.S. economy but warned that trade tensions pose a risk to that momentum , Managing Director Christine Lagarde said Thursday (June 6) in Washington.
The Fund released its annual economic review of the United States, called an Article 4 consultation showing that economic activity will grow this year and in to 2020.
“Our assessment is that the economy will grow this year at about 2.6% percent and next year at around 2 percent. And this represents an increase from our initial growth forecast by point 3 percent so lots of positives and a lot to be proud of on the economic front and the economic indicators are saying so,” Lagarde told reporters.
One of the big risks would be if a tightening of financial conditions led to a ‘feedback loop’ undermining confidence and investment.
“Over the first few months of this year financial market conditions have improved markedly. This is good for near-term growth reducing the cost and increasing access to financing but obviously we are concerned about the risk of an abrupt reversal of financial market conditions that could represent a material downside risks in the US and in particular a sudden tightening of financial conditions could interact adversely with the high level of private public corporate households and sovereign debt and could create a feedback loop that could also weigh on real activity and job creation,” she said.
The IMF continues to urge the Federal Reserve to remain data-dependent on its rate decisions.
“As you know earlier this year the Federal Reserve has indicated that it was pausing its process of raising interest rates we fully agree with that approach and believe that this will give policymakers time to gorge the balance of risks to both inflation and employment outcome and to build a clearer picture of whether further adjustments in the federal funds rates are warranted,” Lagarde said.
Lagarde said that while the effects of trade tensions had not sparked inflation at this point, if threatened tariffs and trade restrictions are allowed to be enacted and kept in place it will inevitably lead to lower growth and higher prices passed to consumers.
“We believe that for the global economy to actually function well it needs to be able to rely on a more open more stable more transparent more predictable and rules based international trade system. And as such it will be essential for the US and all its trading partners including the likes of China Mexico and others to agree on a new system to agree to eliminate the distortions that put a brake on growth,” she said.
Lagarde had a simple message for all: “As I’ve said many times, nobody wins a trade war and everybody suffers.”