WASHINGTON: The US economy is expanding faster than any other advanced nation, and in weeks will hit a historic milestone, but the International Monetary Fund and many economists are warning of building signs of trouble.
President Donald Trump’s multi-front trade wars, especially with economic power China and the coming conflict with Mexico, threaten to stifle growth in those countries and have dire consequences for the global economy.
For now, US data is showing little impact on the overall economy but global financial markets have been shaken by the trade conflict and the US Federal Reserve this week opened the door to cutting interest rates to salvage growth.
The IMF upgraded its forecast for US growth this year to 2.6%, three tenths higher than it predicted in April, while growth in 2020 is seen slowing to just under 2%.
The US Commerce Department reported Thursday that the trade deficit fell in April – good news for Trump who has made that a key focus of his administration.
However, the deficit in goods trade with China expanded, undercutting the goal of his aggressive tariff strategy.
And economists note that falling imports and exports are a sign US economic momentum is weakening.
“It’s nice that the trade deficit narrowed but it did so for all the wrong reasons,” economist Joel Naroff wrote in a note to clients.
In its annual review of the US economy, the IMF warned that “material risks” overshadow the outlook, including trade uncertainty, rising debt levels and growing inequality.
“It is especially important that the trade tensions between the US and China – which represent a threat to the global outlook and create important negative spillovers to other countries — are quickly resolved,” the report said.
In contrast to the upgrade for the United States, the IMF this week trimmed the outlook for China to 6.2% this year, a tenth lower than in April.
IMF chief Christine Lagarde on Wednesday urged the countries to make resolving the trade conflict a priority, since it threatens the global economy, which has already begun slowing.
And the US is not safe even from its perch of atop the economic hierarchy.
Lagarde told reporters Thursday “there is lot for Americans to be proud of. In a matter of weeks, the US economy will be in the longest expansion in recorded history.”
However, she flagged the concerns raised in the IMF report warning that public debt is on an unsustainable upward path and corporate debt is rising, leaving the economy vulnerable should interest rates rise.
And more action is needed to address inequality and help those hurt by the move to globalisation and the increased use of technology, the report said.
Lagarde said “the benefits from this decade-long expansion have, in general, not been shared as widely as they could have been,” and noted the United States has the highest poverty rate of any advanced economy and that life expectancy is falling.
The median household income has risen only 2.2% from the end of the last century, even though the economy has expanded 23% per capita.
“The wealth and income distribution are increasingly polarised,” the report said. “The poorest 40% of households have a level of net wealth that is lower today than it was in 1983.”
The fund called on Washington to raise revenues from measures like a carbon or gas taxes to pay for improvements in education and infrastructure that could boost productivity and economic growth.
Likewise, a reform of immigration policies towards high-skilled workers could “increase productivity… as well as lessen the pressures from ageing” in the US population, the report said.