The International Monetary Fund cut its forecast for the US economy Tuesday, saying it could no longer assume the Trump administration will be able to deliver pledged tax cuts and higher infrastructure spending.
Trump's budget for the fiscal year ending in 2018 assumes the economy will grow by 2.9 per cent on average in the coming decade, but the IMF's central forecast says this is unlikely to be achieved in the absence of a clear plan.
Under this modelling, growth is expected to rise modestly by 2.1% this year and next, driven by consumption and a revival in private investment. Growth will slip to 1.9 per cent in 2019 and 1.8 per cent in 2020, according to the fund's forecasts. "For policy changes to be successful in achieving sustained, higher growth they would need to raise the U.S. potential growth path".
Nevertheless, it summed up the situation by saying that "the U.S. economic model is not working as well as it could in generating broadly shared income growth". "Most critically, relative to historical performance, post-crisis growth has been too low and too unequal".
In its annual check-up on the state of the world's largest economy, the globe's lender of last resort said it was dropping its assumption that tax cuts and higher infrastructure spending would boost growth as the plans were "still evolving".
"All in all, in our judgment, the USA economic model is not working as well as it could in generating broadly shared income growth", said Alejandro Werner, head of the IMF's Western Hemisphere department.
"A comprehensive policy package is needed" to respond to those challenges, the report said. It is impossible, however, to comprehensively calculate the real effect of the Trump-proposed measures at this point, the Fund admitted, but any such assessments no the IMF's part are quite cautious.
The IMF's assessment casts doubt over a more optimistic forecast in the White House budget proposal, which projects growth will accelerate to 3 per cent by 2020 and keep up that pace for seven more years.
In January, the International Monetary Fund raised its growth projection for the US, assuming that Trump and a Republican controlled Congress would get tax reform and other economic reforms under way.
The IMF notes that the U.S.is enjoying its third-longest expansion since 1850, with "persistently strong" job growth. Jobs don't help any longer.
Given the weaknesses in the economy, the fund said the Federal Reserve should aim to temporarily overshoot its 2% inflation target by gradually easing into its planned interest-rate increases.
To address these shortcomings, and given the phase of the economic cycle, the IMF advised the USA should gradually remove fiscal and monetary support and focus on raising its potential for growth, increasing competitiveness and strengthening the supply side of the economy.