(Bloomberg) -- The International Monetary Fund upgraded its U.S. growth outlook even as it warned that the expansion risks being knocked off course by a further escalation in trade tensions or a significant downturn in financial markets.
The IMF, in its annual review of the U.S. economy, raised its growth forecast to 2.6% this year, up 0.3 percentage point from a projection it made two months ago.
“There is a lot for Americans to be proud of. In a matter of weeks, the U.S. economy will be in the longest expansion in recorded history,” IMF Managing Director Christine Lagarde said at a press conference in Washington on Thursday. Still, she urged the U.S. and its trading partners including China and Mexico to “quickly” resolve their differences. “Nobody wins a trade war,” she said.
President Donald Trump is rattling financial markets with his widening trade war against America’s trading partners. He hiked tariffs on Chinese products after talks with Beijing broke down, and has threatened to slap duties on Mexican goods if that nation doesn’t do more to stem illegal migration into the U.S.
The IMF cut its outlook for global growth in April to the lowest since the financial crisis, the third time it downgraded its forecast in six months. The fund said growth would pick up in the second half of the year, but that was based on the assumption that the U.S. and China wouldn’t hike tariffs on each other.
The fund projected in April that the U.S. economy would grow 2.3% this year before slowing to 1.9% in 2020 as the effects of Trump’s tax cuts fade. In raising its forecast on Thursday, the fund noted that real wages are rising and productivity growth appears to be recovering.
Market Moves
The S&P 500 delivered its worst May return in seven years, falling 6.6%, amid renewed trade tensions. However, markets climbed this week after Federal Reserve chair Jerome Powell signaled openness to a rate cut amid rising trade tensions. Powell said Tuesday the central bank is closing monitoring the fallout from the deepening set of disputes between the U.S. and its largest trading partners.
On monetary policy, the IMF on Thursday said it supported the Fed’s move to pause interest-rate hikes until policy makers get a clearer picture about inflation and unemployment trends.
The fund suggested that the U.S. central bank should be open to allowing “for some temporary overshooting of the Federal Reserve’s inflation goal so that inflation approaches the Fed’s 2 percent medium-term target from above.”
The fund warned about the harm inflicted on the U.S. economy from government shutdowns and recurring “political brinkmanship” over Congress raising the federal debt ceiling to avoid defaulting on loan payments. Treasury Secretary Steven Mnuchin warned last month that the government could face default by late summer and he’s encouraged Congress to raise the limit as soon as possible.
“The prolonged government shutdown earlier this year demonstrates, once again, the dysfunction inherent in the U.S. budgetary process,” the fund said. “Such policy-induced uncertainty is not good for the U.S. economy and has negative outward spillovers for the rest of the global economy.”
(Updates with growth outlook upgrade in first paragraph.)