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IMF lowers its estimate of US growth in 2014 to 2 per cent from previous 2.7 per cent forecast

WASHINGTON - The U.S. economy is poised to accelerate after a dismal start to the year even though the job market won't return to full employment until 2017.

That was the forecast offered Monday in a report by the International Monetary Fund.

The IMF noted that steady job gains and other recent data suggest that the economy is rebounding. Employers have added 200,000-plus jobs for four straight months, and the unemployment rate has fallen to 6.3 per cent. Auto sales and factory activity are increasing.

Yet growth in 2014 won't likely top last year's lacklustre performance, the IMF says. The Washington-based organization foresees the economy growing a modest 2 per cent in 2014, below its previous estimate of 2.7 per cent. That would be nearly identical to the 1.9 per cent growth in 2013.

The IMF blames the lingering aftermath of the brutal winters and a sluggish recovery in home sales. Years of disappointing growth mean the economy might not reach full employment — which many economists say is when the unemployment rate is between 5 and 5.5 per cent — for three more years.

Christine Lagarde, the IMF's managing director, suggested at a news conference that the past winter shows that another wild card might be holding back the economy and could make predictions more difficult: climate change.

"Extreme weather occurrences have repeated much more frequently in the past 20 years than the previous century," she stressed. "That's a reason to wonder about climate change and how to deal with it."

Yet the IMF is optimistic that a "renewed dynamism" will propel growth for the rest of 2014, partly offsetting what many analysts think was a contraction of up to 2 per cent last quarter.

The unemployment rate has tumbled to 6.3 per cent from 7.5 per cent in 12 months, evidence of that momentum.

But the IMF cautions that U.S. wages remain stagnant and the rate of long-term unemployment high. As a result, it urged lawmakers to lift the minimum wage and increase the Earned Income Tax Credit for those with low wages.

The IMF's projections match many recent private forecasts.

"The monthly economic numbers have generally been pretty good recently, but the weakness of GDP growth in the first quarter suggest that full-year GDP growth is likely to be close to 2 per cent," said Ryan Wang, an economist at HSBC Bank.

The IMF also highlighted the challenge for the Federal Reserve to properly time the unwinding of its policies to spur borrowing, investment and spending. Investors appear to be acting with a sense of certainty about Fed policies, even though central banks must respond to uncertainties about the economy, Lagarde said.

Lagarde also suggested that Fed Chair Janet Yellen should increase the number of news conferences she holds to up to six a year from the current four. Yellen is scheduled to hold one of her quarterly news conferences on Wednesday.

The Fed has kept short-term interest rates near zero to bolster the economy. It has also bought U.S. Treasury and mortgage bonds to keep longer-term rates low, a program the Fed has been unwinding since the start of the year.

Because the IMF projects that the United States won't reach full employment until 2017 and that inflation pressures will stay tame, it thinks the Fed might consider keeping rates near historic lows longer than some market analysts expect.

Raising rates too fast could "constrict the recovery momentum that we have observed," Lagarde said. She added that that would have spillover effects around the world and hurt growth in emerging economies.

Lagarde declined to take a stance on the dispute over payments for natural gas that Ukraine owes Russia. The two countries, embroiled in a broader territorial struggle, missed a Monday deadline to reach an agreement on payments. As a result, the Russian company Gazprom has cut off gas supplies to Ukraine.

"We don't intervene in commercial transactions," Lagarde said. "We certainly hope for the stability of that part of the world and for the stability of the supply of gas that the situation can be addressed promptly and satisfactorily."

The Canadian Press


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