IMF Cuts U.S. Growth Outlook, Warns On Budget Paralysis

Washington (AFP) – The International Monetary Fund on Tuesday cut its growth forecast for the U.S. economy, and warned that Washington’s political paralysis could drag growth down further.

The Fund, in its new World Economic Outlook, said the U.S. economy would grow 1.6 percent this year and accelerate to 2.6 percent in 2014, compared to 1.7 percent and 2.8 percent in its July forecast.

It said the reduction was due to the impact of the sharp sequester spending cuts instituted by the government earlier this year aimed at trimming the federal deficit.

The economy still needs the Federal Reserve’s easy-money policy, including its $85 billion a month stimulus program, which the Fund said should be trimmed only slowly over the next year.

But it warned that continued political havoc over the federal budget and borrowing cap, which has forced the shutdown of parts of the U.S. government, and more tightening of financing conditions could begin to hurt growth.

“Despite some upside potential, risks to the outlook remain tilted to the downside,” the Fund said.

“A longer shutdown could have sizable adverse growth implications. A failure to promptly raise the debt ceiling could also adversely affect financial markets and economic activity, with spillovers to the rest of the world,” it said.

“Overall, an untimely tightening in U.S. monetary conditions combined with shocks from the external front — such as further deceleration in growth in other major economies… could lower US growth by close to one-half percentage point over the next year and by one percent in the medium term.”

AFP Photo/Saul Loeb