BEGINNING OF THE END

The IMF says the US economy’s growth spurt may come to a messy end

The International Monetary Fund is wringing its hands over the state of the US’s public finances under Donald Trump’s administration. The organization says the near-term outlook for the US economy couldn’t be rosier. Next year, the US is expected to mark its longest economic expansion on record, and the job market is in the midst of an unprecedented stretch of growth.

It won’t last.

Trump’s tax cuts and spending boost will help increase growth in the short term, but build up risks further in the future, the IMF says. The IMF is forecasting a gradual economic slowdown out to 2020, but says such a path would be “historically unusual” and may prove to be too optimistic. “The output gap could close more abruptly, through a policy-induced recession, with negative spillovers for the global economy,” the IMF says.

The report published today comes after an official IMF staff visit to the US, a routine process for member countries. It forecasts real GDP growth of 2.9% this year and 2.7% next year. But then it falls steeply, to 1.9% in 2020, and—eventually—1.4% in 2023.

The combination of tax cuts and higher defense and discretionary spending will cause the federal government deficit to exceed 4.5% of GDP in 2019, according to the IMF, nearly double what it was three years ago. “Such a strongly procyclical fiscal policy is quite rare in the US context and has not been seen since the Johnson administration in the 1960s,” the report says.

A deficit of this size would make America’s “already unsustainable” debt path even worse. The US is the only country the IMF expects to boost its debt-to-GDP ratio over the next five years. There are plenty more risks for the US (a surprise increase in inflation), for the rest of the world (money flowing out of emerging markets and back into the US dollar, making it even harder for countries to pay off dollar-denominated debt), and for both (the rise of protectionism).

The IMF has a few ideas about what the US can do to reduce its debt levels, including reforming social security, raising the retirement age, a broad-based carbon tax, and containing healthcare cost inflation. Thus far, warnings about the combination of tax cuts, increased spending, and protectionism don’t appear to be gaining much traction.

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