IMF: "US Deficit and Trade Policy Toward China Threaten Global Economy"

Inflation at 2% in 2025... Interest Rate Cut Appropriate by Year-End

The International Monetary Fund (IMF) has warned of the risks posed by the United States' massive fiscal deficit and aggressive trade policies toward China. It stated that the earliest appropriate time for an interest rate cut would be the end of 2024.

On the 27th (local time), the IMF issued a statement after concluding its annual consultation with the United States, announcing these views.

[Image source=AFP Yonhap News]

The IMF noted that while the U.S. economy remains strong, "the fiscal deficit is too large, causing the public debt-to-GDP ratio to continuously rise," and pointed out that "the ongoing expansion of trade restrictions and insufficient progress in addressing vulnerabilities highlighted by the 2023 bank failures represent significant downside risks."

Accordingly, the IMF lowered its U.S. growth forecast for this year by 0.1 percentage points from the April projection to 2.6%.

Regarding U.S. trade policy, the IMF stated, "The United States must actively cooperate with trade partners to address key issues such as unfair trade practices that risk undermining the global trade and investment system, supply chain vulnerabilities, and national security concerns." It criticized policies such as tariffs, non-tariff barriers, and requirements to use U.S.-made materials, saying these distort trade and investment flows, weaken the multilateral trade system, fragment global supply chains, and provoke retaliatory measures from trading partners. The IMF added that "these policies are not the right solution" and emphasized the need to remove barriers to free trade and strengthen competitiveness through worker training and infrastructure investment.

Bloomberg pointed out that the IMF has taken a critical stance on U.S. economic policy, warning that the national debt level is unsustainable and that U.S.-China competition poses risks to the global economy.

The U.S. Congressional Budget Office (CBO) estimated on the 18th that the U.S. fiscal deficit for this year would reach $1.92 trillion, a 27% increase from its February forecast. The deficit-to-GDP ratio was projected at 6.7%. In contrast, European Union (EU) countries maintain guidelines to keep their deficit-to-GDP ratios below 3%. The IMF projected that if current U.S. policies continue, general government debt will exceed 140% of GDP by 2032. The IMF stated, "There is a need to reverse the continuous increase in the public deficit-to-GDP ratio," and emphasized that "this chronic fiscal deficit must be urgently addressed."

The IMF forecasted that U.S. inflation will continue to ease and fall to the Federal Reserve's 2% target by mid-next year. The Fed had predicted inflation would reach 2% by 2026, so this forecast is earlier. Regarding interest rate cuts, the IMF said, "The Fed should not cut rates at least until the end of 2024," and stressed that clear evidence of inflation steadily declining toward 2% is necessary before any rate reductions.