The U.S. will grow twice as fast as all other G7 countries this year, according to IMF forecasts, as the strength of the world's largest economy rattles global markets.
Strong household spending and investment will help boost U.S. growth to 2.7 percent this year, according to the fund's latest global economic outlook.
The value is above the 2.5 percent estimated for 2023 and represents an improvement of 0.6 percentage points compared to the previous forecast.
The forecasts underscore the U.S. economy's role as an engine of global growth as investors around the world scale back their expectations of interest rate cuts from the Federal Reserve.
The IMF said Canada would be the next best G7 candidate, with growth of 1.2 percent this year.
Germany will be the weakest of the G7 with growth of 0.2 percent, it said. Japan is forecast to grow by 0.9 percent, while the United Kingdom will grow by just 0.5 percent after stalling in 2023.
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Global stock markets fell and Asian currencies were hit by a rising dollar on Tuesday after a sell-off on Wall Street sparked by strong U.S. retail sales that suggest the Fed may raise interest rates this year could reduce less than previously assumed.
Pierre-Olivier Gourinchas, chief economist at the IMF, told the Financial Times that the Fed could be thrown off course by the improving U.S. economy, although the “base case” still calls for three-quarters of a percent rate cuts this year.
“If inflationary pressures continue further than they currently do, particularly in the US, then we would expect later cuts and perhaps fewer cuts,” he said.
The Stoxx Europe 600 index fell 1.6 percent in afternoon trading, while the US S&P 500 opened slightly lower after losses the previous day. Shifting U.S. interest rate expectations also impacted foreign exchange markets, pushing the Indian rupee to a record low and the Indonesian rupiah to its weakest level in four years against the dollar.
Gourinchas added that the Fed's rate cuts from this summer could be delayed until the fourth quarter – possibly after the November presidential election – if inflation exceeds the IMF's expectations.
US President Joe Biden is hoping that US economic strength will help him overcome his poll deficit against Donald Trump, the presumptive Republican nominee.
An FT-Michigan Ross poll this week found that the number of registered voters who approve of Biden's handling of the economy is rising but is still a minority and nearly four in five expressed deep concern about inflation. A delay in Fed rate cuts could also hurt the president's re-election hopes.
Currently, investors expect the Fed to cut interest rates through September and possibly more than once through the end of the year.
Recent record growth in the US has helped the global economy avoid a long-feared hard landing following interest rate hikes.
But strong demand has also led to increased price pressure, in contrast to the UK and the Eurozone.
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The IMF said inflation would continue to fall in the United States but raised its forecast for this year to 2.9 percent, above the forecast 2.4 percent for the euro zone and 2.5 percent in the United Kingdom.
Gourinchas said the European Central Bank and the Bank of England could cut rates sooner because they do not face such a “strong demand-driven component of inflation.”
The fund made its forecasts as central bank governors and finance ministers attended the joint spring meetings of the IMF and World Bank in Washington. He noted that global economic activity had proven “surprisingly resilient” even after central banks raised interest 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 the conflict in the Middle East.
The overall picture is still one of subdued growth by historical standards, with global growth expected to remain at 3.2 percent this year and next, in line with the 2023 estimate.
The IMF said the long-term consequences of the coronavirus pandemic, Russia's full-scale invasion of Ukraine, weak productivity growth and increasing “geoeconomic fragmentation” were hampering expansion.
The cause of disinflation in advanced economies is fueled by a stronger-than-forecast increase in employment, partly due to the influx of migrants, the IMF said. It found that since 2021, economies such as Canada, the Eurozone, the UK and the US have seen faster growth in foreign-born workers rather than domestic workers.
Among other leading economies, the IMF forecast China's growth would slow to 4.6 percent this year from 5.2 percent in 2023, while India, one of the world's fastest-growing economies, was forecast for this year were increased to 6.8 percent.
Russia received one of the biggest improvements: Growth is now expected to be 3.2 percent this year, 0.6 percentage points higher than previously expected, followed by growth of 1.8 percent in 2025. The IMF doubled its forecast for Russian growth in January The outlook fueled concerns among G7 countries that the sanctions would not harm Vladimir Putin's war economy.
Gourinchas said Russian expansion was driven in part by strong oil export revenues coupled with strong private investment.
“Domestic demand is very strong,” he said. “The sanctions are still degrading and are gradually affecting the Russian economy, but the economy itself is quite resilient.”
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