The International Monetary Fund chief criticized the U.S. on Tuesday for cutting back government spending too much too fast, saying it was taking a toll on growth in one of the world’s main economic engines.
Christine Lagarde also said upbeat financial markets are out of whack with a sluggish global economy that is showing signs of slowing even further.
In an overview of trouble spots around the world, Lagarde said the U.S. had come a long way in the five years since it triggered the global economic crisis with financial excesses.
“Despite this progress, the U.S. is not doing as well as it should, largely because of self-inflicted fiscal wounds,” she said, a reference to government belt-tightening which the IMF says has gone too far too fast.
She particularly criticized across-the-board federal spending cuts imposed in March, known as “sequestration.”
“Sequestration alone, if not reversed, could cut a half-percent of GDP growth. It is also an extremely blunt instrument, imposing deep cuts in many vital programs, including those that help the most vulnerable, while leaving untouched the key drivers of long-term spending,” Lagarde said, speaking at the Brookings Institution in Washington, where the IMF is based. “If the sequester were to be replaced by more back-loaded measures, however, growth should strengthen in the second half of the year,” she added, with the caveat that she did not expect that to happen.
Nevertheless, she said U.S. prospects for the next couple of years look quite positive, but in the medium and long term, spending on key healthcare programs and Social Security is expected to widen the budget deficit and increase the country’s debt burden.
For the global economy, she said she sees “glimpses of more somber trends” that signal slowing growth.
“We are still seeing upbeat financial markets sitting uncomfortably beside a more downbeat real economy,” Lagarde said.
“Recent data, for example, suggest some slowdown in growth. At the same time, the downside risks to growth remain as prominent as ever.”