The IMF’s reality check to Mr. Trump
There could not be a sharper contrast between President Trump’s bullish assessment of the U.S. economic outlook at the Davos World Economic Forum and that of the IMF in the gloomy World Economic Outlook report it issued ahead of the Davos meetings.
According to Trump, the American Dream is back and the U.S. is enjoying an economic boom the likes of which the world has never seen before. Unemployment is at a 50-year low, wages are increasing at the fastest rate in a decade, and the stock market is setting new records on almost a daily basis.
With such a strong economic performance, Trump is at a loss to understand how anybody could possibly think of having him removed from office.
The IMF certainly does not share Trump’s rosy assessment of the U.S. economy. Indeed, it reminds us that U.S. economic growth was barely 2 ¼ percent in 2019. It also forecasts that U.S. economic growth will most likely decelerate to 2 percent in 2020 and to 1 ¾ percent in 2021.
The IMF is diplomatic enough not to mention that, if realized, these economic growth rates would be below the 2 ¼ percent achieved by President Obama in his second term of office. They would also be around half of the 4 percent economic growth that Trump so confidently promised us that he could deliver.
The IMF also does not mention that under President Trump’s watch and at a time that the U.S. economy was at full employment, the U.S. budget deficit has ballooned to over $1trillion, or 5 percent of GDP, and the U.S. public debt is well on its way to exceed 100 percent of GDP.
Nor does the IMF mention how counterproductive President Trump’s trade wars have been. In the IMF’s view, Trump’s America First trade policy has been the principal reason why 90 percent of the world’s economies are now experiencing economic slowdowns. Yet despite the damage that Trump’s trade wars have inflicted on the global economy, the U.S. trade deficit has widened by some 20 percent since Trump took office.
The IMF warns that despite the recent truce in the U.S.-China trade war, the risks to the U.S. and global economies are very much towards the downside. Among these risks are those of rising geopolitical tensions between the U.S. and Iran that could result in a disruption in world oil supply; intensifying social unrest across many countries (such as Chile, Colombia, Ecuador, France, Hong Kong, Lebanon and Venezuela); and a possible deterioration in U.S.-European trade relations.
More ominously yet, the IMF warns that a materialization of any of the risks to which it points could trigger rapid shifts in financial sentiment, portfolio reallocations toward safe assets and rising rollover risks for vulnerable corporate and sovereign borrowers. It also warns that the widespread tightening of financial conditions that would result would expose the large global financial vulnerabilities that have built up over many years of very low interest rates.
To be sure, there is always a great degree of uncertainty about the accuracy of any economic forecast. But about one thing it seems one can be certain. If the U.S. economy continues to underperform this year, Trump will find anyone else to blame but himself.
As if to underline this point, Trump is now arguing that had it not been for Federal Reserve Chair Jerome Powell’s misguided interest rate increases last year, the U.S. economy would have been growing at 4 percent and the U.S. stock market would have been some 5,000 to 10,000 points higher than it is today. Never mind that no respectable economist would support the notion that a ¾ percentage point cut in interest rates could possibly deliver 2 full percentage points of economic growth.
Judging by his remarks in Davos, Trump seems to have decided that a strong U.S. economy will be front and center in his election campaign. Judging by the IMF’s downbeat World Economic Outlook update, it is not clear that doing so will assure Trump’s reelection in November.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.