The International Monetary Fund announced Tuesday that it is lowering its forecast for U.S. growth this year, and the downgrade is casting a shadow on the outlook for performance among the world’s advanced economies.
The IMF expects that America’s output will expand by a tepid 1.6 percent, more than half a percentage point less than forecast in July. It is the biggest decline for a developed nation and is driven by unexpectedly weak business investment and slim inventories. Overall, the fund predicted that advanced economies — which include Europe, the United Kingdom, Japan and Canada — will grow 1.6 percent, down 0.2 percentage points from the IMF’s last estimate.
However, slower growth in developed nations is being offset by slightly faster improvements in emerging economies, the IMF said. It edged up its forecast for those countries by 0.1 percentage points to 4.2 percent. That was enough to hold the IMF’s estimate of global growth steady at 3.1 percent this year.
“The world economy has moved sideways,” IMF Chief Economist Maury Obstfeld said. “Without determined policy action to support economic activity over the short and longer terms, sub-par growth at recent levels risks perpetuating itself — through the negative economic and political forces it is unleashing.”
The IMF pointed to Britain’s decision to leave the European Union as an example of rising sentiment against globalization that risks undermining international trade and investment, a key factor driving the world economy for decades. British Prime Minister Theresa May said this week that the country would formally declare its intention to break with the E.U. by the end of March and suggested it would withdraw from the single market that has been a hallmark of membership.
The IMF had warned that the so-called Brexit could depress growth in the United Kingdom for years. But on Tuesday, it increased its British growth forecast by 0.1 percentage points to 1.8 percent — better than the outlook for the United States — as the worst-case scenarios failed to materialize. Still, the fund warned that the exit will raise many questions in the coming years.
“Although the market reaction to the Brexit shock was reassuringly orderly, the ultimate impact remains very unclear, as the fate of institutional and trade arrangements between the United Kingdom and the European Union is uncertain,” the IMF report stated.
Meanwhile, in the United States, both presidential candidates have opposed an expansive new trade deal with countries bordering the Pacific Rim, known as the Trans Pacific Partnership. Republican nominee Donald Trump, in particular, has sharply criticized longstanding free trade deals such as NAFTA and called for steep new tariffs on goods from China and Mexico.
Though the IMF did not single out Trump’s proposals, it referenced “political tensions” in advanced economies that are generating broader uncertainty — further diminishing the prospects for growth.
“The result in some richer countries has been a political movement that blames globalization for all woes and seeks somehow to wall off the economy from global trends rather than engage cooperatively with foreign nations,” Obstfeld said.