U.S. economic growth this year will likely be at the weakest pace since the Great Recession ended, the International Monetary Fund said, mostly because of a sharp, weather-related contraction in the first quarter.
But the global lending organization said Wednesday that it still expects growth resumed in the April-June quarter and will remain healthy in the second half of this year and next.
In its annual report on the U.S. economy, the IMF projects growth will be just 1.7 percent this year, down from a 2 percent estimate in June. That is below last year’s 1.9 percent pace and would be the slowest annual rate since the recession ended in June 2009.
The IMF’s outlook is more pessimistic than that of the Federal Reserve, which expects growth of at least 2.1 percent. But it is in line with most other private economists.
The IMF says growth will rebound in the April-June quarter to a healthy 3 percent to 3.5 percent and remain in that range for the rest of this year. It also projects the economy will expand 3 percent in 2015, which would be the best showing since 2005.
“Behind that pessimistic number, we do see a relatively optimistic view of the economy going forward,” said Nigel Chalk, deputy director of the IMF’s Western Hemisphere department.
At the same time, the IMF expects unemployment to remain elevated for a longer period than the Fed does. That’s partly because the IMF calculates that up to a third of those who have stopped looking for work since the recession will resume their job searches. Not all will immediately get hired, however.
And it also projects that millions of those who are working part-time but want full-time jobs will keep searching. That would give the unemployed more competition, slowing the rate’s decline.
The IMF projects unemployment won’t fall to 5.5 percent until 2018, the IMF report said. That’s two years later than the Fed projects.
A slower path to full employment would allow the Fed to postpone raising interest rates for longer than it currently plans, the report said. Most economists forecast the Fed will begin raising the short-term rate it controls by the middle of next year.
The U.S. economy shrank 2.9 percent in the first three months of the year, its worst showing in five years. Like most economists, the IMF attributed the slowdown partly to harsh winter weather, which closed factories and kept shoppers away from car dealerships and stores. It also cited other temporary factors, including a drop in exports and a slowdown in goods restocking.
But hiring has remained strong since the beginning of the year, despite the grim first quarter. That should boost consumer spending, the IMF said. Businesses will also likely step up their spending on plants and equipment, which has been weak so far this year.
The economy should benefit as government spending cuts and tax increases have slowed compared with 2013, the IMF said. Political fights over the budget have also ended, at least for this year, Chalk noted. That has allowed the IMF to focus on longer-term issues facing the U.S. economy.
One of them is poverty. The IMF’s report said that “recent growth has not been particularly inclusive,” and noted that roughly 50 million Americans are poor, despite five years of growth and a steady drop in unemployment. The U.S. should boost its minimum wage and expand tax credits for the working poor, the report recommended.
In addition, growth may sink back to 2 percent in the long run, the IMF warned, as the population ages. The U.S. should encourage more Americans to work by providing more childcare assistance, which could reverse recent declines of women in the workforce. Reforms to the government’s disability program could also encourage more part-time work, the report said.
The U.S. should also spend more on roads, bridges and other infrastructure to boost productivity, the IMF said.