(Adds details on Fed rate hikes, risks, fiscal spending)
By Anna Yukhananov
WASHINGTON, July 23 The International Monetary
Fund on Wednesday said it expects the U.S. economy to grow 1.7
percent in 2014, even more slowly than it predicted a month ago,
as weakness in the first quarter offsets an expected pick-up in
the second half of the year.
The IMF, which in June forecast 2 percent growth for the
world's largest economy this year, said U.S. activity should
accelerate to a pace of 3 percent to 3.5 percent in the rest of
2014, and grow by 3 percent next year and in 2016.
"Still, the drag on growth from the first quarter
contraction will not be offset," IMF staff said in their yearly
analysis of the U.S. economy.
U.S. GDP contracted at a 2.9 percent annual pace in the
first three months of the year, dragged down by a weak housing
market, a slower pace of restocking by businesses and lower
exports. It was the sharpest decline in five years.
Lower growth expectations should contribute to continued
slack in the labor market for the next three to four years, with
the United States remaining below full employment until 2018,
the IMF said.
It added that the U.S. Federal Reserve could keep its
benchmark interest rates at zero beyond the middle of 2015, the
date implied by policymaker forecasts, as long as inflation and
financial stability concerns remain subdued.
The IMF said it believed the U.S. central bank could then
raise rates at every other policy meeting, in what would be a
more gradual approach than median Fed forecasts currently
Future U.S. growth could be disappointing if U.S. interest
rates rise too quickly, there is a broader and concerted
slowdown in emerging markets, and increasing geopolitical
tensions in Iraq and Ukraine prompt higher energy prices and
severe financial and trade disruptions, according to the IMF.
The IMF also warned that an aging U.S. population meant the
economy would not be able to grow above 2 percent in the
longer-term without significant reforms, including tax and
immigration changes, more investment in infrastructure and job
training, and the provision of childcare assistance, which could
help lure more Americans into the workforce.
Even without these measures, the IMF said there is "a strong
case" for more government spending to support the economic
recovery in the near-term, as long as there is a plan to deal
with high entitlement spending later on.
For the first time in several years, the IMF also focused on
the deep pockets of U.S. poverty. It urged the United States to
expand the earned income tax credit to the poorest workers and
boost the minimum wage, which together should help the poor
without a making a huge dent in the government's budget.
"We do think (poverty) is macro-relevant, we do think it's
important for growth, and both economic and social
sustainability in the United States," Nigel Chalk, deputy
director of the IMF's Western Hemisphere Department, told
(Reporting by Anna Yukhananov; Editing by Paul Simao)