The US is on track to grow at twice the rate of the rest of the G7 this year, according to IMF forecasts, as strength in the world's largest economy shakes international markets.
According to the fund's latest report, stronger household spending and investment will help U.S. growth rise to 2.7 percent this year. World Economic Outlook.
This figure is higher than the estimated 2.5 percent in 2023 and represents a 0.6 percentage point improvement on the previous forecast.
The projections highlight the role of the U.S. economy as a driver of global growth as investors around the world recalibrate expectations for a Federal Reserve interest rate cut.
The IMF said the next best performer in the G7 this year would be Canada with 1.2 percent.
It said Germany's expansion would be the weakest of the G7 at 0.2 percent. Japan is forecast to experience 0.9 percent growth, while the UK will expand by just 0.5 percent after flatlining in 2023.
Global stock markets fell and Asian currencies rose against the dollar on Tuesday, following a sell-off on Wall Street that suggested the central bank may cut rates less this year than previously thought, spurred by strong U.S. retail sales data.
IMF chief economist Pierre-Olivier Gourinchas told the Financial Times that while the “baseline” was still three-quarter-point cuts this year, the U.S. economy's recovery could throw the central bank off course.
“If inflationary pressures persist beyond what we have now, particularly in the U.S., we expect them to have later cuts and fewer cuts,” he said.
The Stoxx Europe 600 index closed down 1.5 percent, its worst day since July. The US S&P 500 was little changed following the previous day's losses. Shifting US rate expectations also hit currency markets, pushing the Indian rupee to a record low and sending the Indonesian rupiah to its weakest level in four years against the dollar.
Gourinchas added that Fed rate cuts could be delayed from this summer until the fourth quarter — after November's presidential election — if inflation exceeds IMF expectations.
US President Joe Biden hopes US economic strength will help him overcome his poll deficit against presumptive Republican Donald Trump.
An FT-Michigan Ross poll this week found the number of registered voters who approve of Biden's handling of the economy is growing, but remains a minority, and four-fifths expressed deep concern about inflation. Any delay in central bank interest rate cuts could also hurt the president's re-election hopes.
Currently, investors expect the central bank to cut rates by September and possibly more than once before the end of the year.
Recent buoyant US growth has helped the global economy avoid the long-feared hard landing following interest rate hikes.
But strong demand has raised price pressures in contrast to the UK and the eurozone.
The IMF said U.S. inflation would continue to decline, but raised its forecast for this year to 2.9 percent, compared to 2.4 percent forecast for the eurozone and 2.5 percent in the UK.
Gourinchas said the European Central Bank and the Bank of England may cut rates because they do not face such “strong demand-driven elements of inflation”.
It released its forecasts as central bank governors and finance ministers attending the joint IMF/World Bank spring meetings in Washington proved global economic activity was “surprisingly resilient” even after central banks raised rates to curb inflation.
But it also warned of risks to the global recovery, particularly the possibility of a fresh rise in commodity prices as a result of conflict in the Middle East.
With global growth projected at 3.2 percent this year and next, as estimated by 2023, the broader picture is still modest expansion by historical standards.
The IMF said the lingering effects of the coronavirus pandemic, Russia's full-scale invasion of Ukraine, weak productivity growth and increasing “geoeconomic fragmentation” were hampering the expansion.
The cause of inflation in advanced economies was helped by a stronger-than-forecast increase in employment, partly due to an influx of migrants, the IMF said. It found that the foreign-born workforce will grow faster than the domestic workforce from 2021 in economies including Canada, the Eurozone, the UK and the US.
Among other leading economies, the IMF predicts China's growth will slow to 4.6 percent in 2023 from 5.2 percent, while forecasts for India, one of the world's fastest growing economies, have been upgraded to 6.8 percent this year.
Russia received one of the biggest upgrades, with growth forecast at 3.2 percent this year, 0.6 percentage points higher than previously expected, followed by 1.8 percent growth in 2025. The IMF doubled its forecast for Russian growth in January. The outlook fed concerns among G7 nations that sanctions have failed to damage Vladimir Putin's war economy.
Gourinjas said the Russian expansion is being driven in part by strong oil export revenues combined with robust private investment.
“Domestic demand is very strong,” he said. “Sanctions are still eroding and having a gradual impact on the Russian economy, but the economy remains very resilient.”
