The International Monetary Fund (IMF) has urged the US to repeal the huge federal budget cuts introduced this year, denouncing them as “excessively rapid and ill-designed”.<\/p>\n
It said the deficit reduction programme would be a drag on growth this year.<\/p>\n
It forecast growth of 1.9% for 2013, but said it could be as much as 1.75 percentage points higher without the rapid tightening of fiscal policy.<\/p>\n
But the IMF added that the overall US economy was improving.<\/p>\n
While the recovery had been “tepid”, it said the overall fundamentals had been gradually getting better.<\/p>\n
It pointed to a rebound in house prices and construction activity, stronger household balance sheets, an improvement in the labour market, and strong corporate profitability.<\/p>\n
‘Slow down, but hurry up’<\/strong><\/p>\n “The deficit reduction in 2013 has been excessively rapid and ill-designed,” the IMF said, in its annual report on the world’s biggest economy.<\/p>\n Not only would spending cuts hurt in the short term, but “indiscriminate” reductions in education, science and infrastructure spending could reduce potential growth in the medium term, it said.<\/p>\n “These cuts should be replaced with a back-loaded mix of entitlement savings (related to healthcare and pensions) and new revenues, along the lines of the administration’s budget proposal.”<\/p>\n “The IMF’s advice is to slow down, but hurry up: meaning slow the fiscal adjustment this year – which would help sustain growth and job creation – but hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability,” managing director Christine Lagarde said.<\/p>\n Smooth exit<\/strong><\/p>\n The Fund’s forecast for growth of 1.9% this year would mark a slowdown from the 2.2% growth the US recorded in 2012.<\/p>\n But it expects a pick-up to 2.7% in 2014.<\/p>\n It expressed support for the Federal Reserve’s $85bn-a-month (\u00a354bn) quantitative easing (QE) programme, and said it should continue with the programme until at least the end of 2013.<\/p>\n The Fed uses QE, a policy of buying bonds, to increase the money supply and improve liquidity in the financial system in the hope of sparking economic growth and supporting employment.<\/p>\n There has been recent concern about when the stimulus measures will be withdrawn, sending jitters through the world’s financial markets.<\/p>\n “The Fed should continue its preparations for a smooth exit. The highly accommodative monetary policy stance has provided important support to the US and global economic recovery,” the IMF said.<\/p>\n However, it warned that unwinding monetary policy accommodation was likely to present challenges and said a long period of low interest rates could have unintended consequences and “sow the seeds of future financial vulnerabilities”.<\/p>\n