line graphIn its annual report on the U.S. economy, The International Monetary Fund (IMF) has stated that the economy has improved over one year ago but is restrained by spending cuts and tax increases. Improvement in sectors such as housing construction, along with improved household finances and steady hiring, has led to a more optimistic analysis than in 2012. However, the IMF is forecasting only a 1.9 percent annual growth this year, down from 2.2 percent in 2012 and below a number of private economists’ expectations.

The IMF reports that tax increases and spending cuts put into play in March will hit the economy hard, knocking off about 1.5 percent of potential economic growth for the year. According to the report, the attempt at deficit reduction “has been excessively rapid and ill-designed.” It recommends Congress to cancel $85 billion in spending cuts in lieu of longer-term reduction in entitlement programs.

The IMF also expects the Federal Reserve to keep interest rates artificially low through sustained bond purchases through the end of the year with only very gradual reduction to purchases in 2014. And despite the warnings of the IMF over too rapid budget reductions, it relays an optimistic picture of the U.S. economy in 2013. It reports that consumers are in better shape than one year ago and the job market continues to gradually strengthen.

The IMF predicts that, after the impact of tax increases and spending cuts fade way, annual economic growth should accelerate to 2.7 percent next year. However, this growth is predicated by Congress and the White House agreeing to raise the federal borrowing limit before the end of 2013. The IMF also anticipates a gradual fall in the unemployment rate over the next few years to reach an average of 7.2 percent in 2014. Though, U.S. exports continue to be sluggish due to economic weakness overseas.

 



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