US economy is expanding faster than any other advanced nation, but IMF is warning it could be weakened by escalating trade wars or a sudden downturn in global financial markets. Photo: Privacy.

JAKARTA (TheInsiderStories) – The United States (US) economy is expanding faster than any other advanced nation, and in weeks will hit a historic milestone, but the International Monetary Fund (IMF) is warning it could be weakened by escalating trade wars or a sudden downturn in global financial markets.

President Donald Trump‘s multi-front trade wars, especially with economic power China and the coming conflict with Mexico, threaten to stifle growth in those countries and have dire consequences for the global economy.

The Trump administration has said the tariffs on China were an effort to create a fairer trading relationship after years in which jobs and technology have migrated to the Asian nation.

The intensifying trade disputes have rocked financial markets over the last few weeks, and analysts at the IMF said the direction of US policy did not bode well.

For now, US data is showing little impact on the overall economy but global financial markets have been shaken by the trade conflict and the US Federal Reserve this week opened the door to cutting interest rates to salvage growth.

The IMF upgraded its forecast for US growth this year to 2.6 percent, three tenths higher than it predicted in April, while growth in 2020 is seen slowing to just under 2.0 percent.

The US Commerce Department reported on Thursday that the trade deficit fell in April – good news for Trump who has made that a key focus of his administration.

However, the deficit in goods trade with China expanded, undercutting the goal of his aggressive tariff strategy. And economists note that falling imports and exports are a sign US economic momentum is weakening.

In its annual review of the US economy, the IMF warned that “material risks” overshadow the outlook, including trade uncertainty, rising debt levels, and growing inequality.

“It is especially important that the trade tensions between the US and China – which represent a threat to the global outlook and create important negative spillovers to other countries – are quickly resolved through a comprehensive agreement that strengthens the international system, not through a managed trade deal that targets a compression in the bilateral US-China trade deficit,” the report said.

In contrast to the upgrade for the US, the IMF this week trimmed the outlook for China to 6.2 percent this year, a tenth lower than in April.

IMF urged the countries to make resolving the trade conflict a priority since it threatens the global economy, which has already begun slowing. And the US is not safe even from its perch of atop the economic hierarchy.

The IMF raised concerns that the US financial system was increasingly vulnerable to a reversal in easy financial market conditions, saying corporate leverage was historically high and underwriting standards were weakening.

“An abrupt reversal of this accommodative environment, interacting with leveraged corporate balance sheets, could create a significant downdraft to activity, investment, and job creation,” the IMF said.

“The financial system appears healthy but medium-term risks to financial stability are rising,” the IMF said in the report.

It criticized US regulators for offering “little institutional response to counter these growing risks” and instead, for easing regulatory constraints.

IMF Managing Director Christine Lagarde in her released statement on Thursday said “there is a lot for Americans to be proud of. In a matter of weeks, the US economy will be in the longest expansion in recorded history.”

However, she flagged the concerns raised in the IMF report warning that public debt is on an unsustainable upward path and corporate debt is rising, leaving the economy vulnerable should interest rates rise.

And more action is needed to address inequality and help those hurt by the move to globalization and the increased use of technology, the report said.

Lagarde said “the benefits from this decade-long expansion have, in general, not been shared as widely as they could have been,” and noted the US has the highest poverty rate of any advanced economy and that life expectancy is falling.

The median household income has risen only 2.2 percent from the end of the last century, even though the economy has expanded 23 percent per capita.

“The wealth and income distribution are increasingly polarised,” the report said. “The poorest 40 percent of households have a level of net wealth that is lower today than it was in 1983.”

The fund called on Washington to raise revenues from measures like carbon or gas taxes to pay for improvements in education and infrastructure that could boost productivity and economic growth.

Likewise, reform of immigration policies towards high-skilled workers could “increase productivity – as well as lessen the pressures from aging” in the US population, the report said.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com