The IMF's latest World Economic Outlook paints a promising picture of the U.S. economy, with strong growth and a stable job market, indicating the rising likelihood of a "soft landing" scenario whereby inflation declines in line with a muted output slowdown.
However, the IMF's flagship report also sounds a cautionary note regarding U.S. fiscal policy and rising government debt.
US Growth Upwardly Revised: The Washington-based institution highlights that the United States has experienced the most substantial recovery among major economies, with its GDP in 2023 expected to surpass pre-pandemic levels.
According to the IMF's updated projections, U.S. economic growth for 2023 is now estimated at 2.1%, a notable increase of 0.3 percentage points compared to previous July estimates. Furthermore, the IMF expects a growth rate of 1.5% for 2024, up 0.5 of a percentage point from previous forecasts.
In other parts of the world, growth projections have taken a downturn, further highlighting the exceptional economic performance of the U.S.
Notably, the euro area's growth forecast has been revised downward by 0.2 percentage points to 0.7% in 2023 and by 0.3 percentage points to 1.2% in 2024. Among advanced economies, Germany stands out as the sole nation expected to face a recession in 2023, with output predicted to contract by 0.5%. Similarly, China's economic growth has been adjusted downward by 0.2 percentage points to 5% in 2023 and by 0.3 percentage points to 4.2% in 2024.
Unemployment Remains Tame: The IMF's report provides reassurance regarding unemployment in the United States. The increase in unemployment is forecasted to be modest, rising from 3.6% to 3.9% by 2025, underscoring the resilience of the U.S. job market in the coming years.
Inflation's Decline on the Horizon: U.S. inflation is expected to show signs of easing. The IMF anticipates that inflation will decrease to 3% by the end of 2023 and further drop to 2.6% by the end of 2024.
Fiscal Policy Raises Alarms: However, one significant concern highlighted in the IMF report is the fiscal policy stance of the United States. The report notes that fiscal conditions have deteriorated substantially. The IMF emphasizes that fiscal policy in the U.S. should not be procyclical, especially given the current stage of the inflation cycle.
The fiscal deficit in the U.S. is expected to experience only a slight reduction, declining from 8.2% in 2023 to 7.4% in 2024 and eventually to 7% by 2028. This trend indicates that fiscal challenges may persist in the years to come.
Rising Government Debt: The IMF projections also anticipate a rise in the U.S. government debt as a consequence of the expansionary fiscal policy. Government debt is expected to increase from 123.3% of GDP in 2023 to 126.9% in 2024, and ultimately to 137.5% by 2028.
Bond Yields To Remain Higher For Longer: The 10-year government bond yield for the United States, a crucial indicator for investors, is projected to average 3.8% in 2023 and increase to 4.0% in 2024.
Currently, the yield on the 10-year Treasury hovers around 4.70%. The performance of a 10-year benchmark note, as tracked by the US 10 Year Note ETF
