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IMF cuts 2014 US economic growth forecast to 1.7%

The International Monetary Fund on Wednesday lowered its US economic growth forecast for 2014 after severe winter weather in the first quarter delivered a sharp contraction.

WASHINGTON: The International Monetary Fund on Wednesday lowered its US economic growth forecast for 2014 after severe winter weather in the first quarter delivered a sharp contraction.

The IMF projected that the world's largest economy would grow a "disappointing" 1.7 percent this year, after a 1.9 percent expansion in 2013.

The forecast marked another downgrade from the IMF, which estimated US growth of 2.0 percent for the year in mid-June, down from a 2.8 percent estimate in April.

"An unusually harsh winter conspired with other factors, including an inventory correction, a still-struggling housing market, and slower external demand" to lead the economy to contract by 2.9 percent in the first quarter, the 188-nation global lender said.

Although activity appears set to pick up in the rest of the year to well above the country's growth potential in a range of 3.0-3.5 percent, it would not be able to offset the first-quarter drag, the worst contraction in five years.

"This means growth for the year as a whole will be a disappointing 1.7 percent," the IMF said in a statement following its annual report card on the member economy, known as an Article IV consultation.

But the following year should see a strong rebound, with 2015 growth picking up steam to a 3.0 percent rate, the fastest annual pace since 2005, it said.

The IMF predicted the improvement would be driven by strong consumption growth, a declining fiscal drag, a pickup in residential investment, and easy financial conditions.

"Risks around this outlook include slowing growth in emerging markets, oil price spikes related to events in Ukraine and Iraq, and earlier-than-expected interest rate rises."

Yet for the medium term, the US economy was expected to level off at just above 2.0 percent for the next several years, "significantly below" the historic average growth rate as activity is weighed down by the effects of an aging population and more modest prospects for productivity growth.

"This makes it critical for the authorities to take immediate steps to raise productivity, encourage innovation, augment human and physical capital, and increase labor force participation," the IMF said.

While welcoming a drop in unemployment rate, with the jobless rate falling to 6.1 percent in June from 7.5 percent a year earlier, the IMF expressed concern about the high level of poverty in the US.

It said that recent growth since the severe 2008-2009 crisis has left millions of Americans behind, with the latest US government data pointing to almost 50 million Americans living in poverty and the poverty rate stuck above 15 percent.

To combat rising poverty, the IMF recommended an expansion of the Earned Income Tax Credit and an increase in the federal minimum wage of $7.25 per hour.

The IMF called for a "long overdue" reform of the tax system to boost potential growth, including a reduction in the federal corporate tax rate, which at 35 percent is the highest among the other 33 industrialized countries in the Organisation for Economic Cooperation and Development.

"Given the substantial slack in the economy, there is a strong case to provide continued policy support to the recovery" that is aimed at reducing poverty and encouraging longer-term growth, it said.

The IMF said that President Barack Obama's fiscal year 2015 budget offers "various valuable steps that would move toward such a policy mix."

Those proposed steps include health-care savings, immigration reform, and measures that limit tax deductions and exclusions for higher earners, the Washington-based institution said.

The Federal Reserve's planned exit from its extraordinarily accommodative monetary policy must be carefully managed to avoid damaging spillover effects on the US and global economies, the Fund reiterated.

The IMF suggested the impending rise in the Fed's key federal funds rate, which has been stuck near zero since 2008 and is expected in mid-2015 by central bank officials, could be pushed back.

With expectations that inflationary pressures will remain muted and full employment only slowly achieved, the Federal Reserve has "some scope for policy rates to stay at zero for longer while still keeping inflation under two percent."

To increase transparency, the IMF recommended that Fed Chair Janet Yellen hold a press conference after each meeting of the policy-setting Federal Open Market Committee.

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