With inflation rising sharply, and the Federal Reserve raising interest rates, the United States is facing an increased risk of a downturn, IMF Managing Director Kristalina Georgieva said Friday.
But any temporary pain caused by a recession would be “a necessary price to pay” to defeat damaging inflation, she said.
The Washington-based crisis lender again slashed its US growth forecast to 2.9 percent, from the 3.7 percent forecast in April, which was cut from the rate predicted at the start of the year.
The world’s largest economy rebounded strongly from the pandemic downturn, but that has come with “unwelcome side effects” of rising prices, Georgieva said.
While the IMF is confident the Fed’s rate hikes will bring down inflation, “We are conscious that there is a narrowing path to avoiding a recession,” she said in a statement.
The Fed last week implemented the biggest increase in its benchmark lending rate in nearly 30 years, as part of its aggressive effort to quell inflation that is at a four-decade high and squeezing American families struggling with rising prices for gasoline, food and housing.
The US economy already was seeing strong demand clashing with supply snarls due to pandemic lockdowns in China and elsewhere, when Russia invaded Ukraine, which has intensified the inflationary pressures.
For 2023, growth is expected to slow to 1.7 percent, but “narrowly avoid” a recession, according to the annual review of the US economy, known as the Article IV consultation.
The IMF chief said the battle against inflation must be the “top priority” despite the impact a US slowdown might have on the global economy.
“Success over time will be beneficial for global growth, but some pain to get to that success can be a necessary price to pay,” she said in response to a question from AFP.
Georgieva met with US Treasury Secretary Janet Yellen and Fed Chair Jerome Powell and the officials “left no doubt as to their commitment to bring inflation back down.”
Nigel Chalk, deputy chief of the IMF’s Western Hemisphere division, said any US recession is likely to be short-lived, given the stockpile of savings and strong business and household balance sheets, and the strong labor market.
“All of those things would help support the economy,” he said. “So if it was hit by negative shock, it should pass relatively quickly and have a relatively quick recovery afterwards.”
– Roll back tariffs –
The IMF also urged Washington to remove punitive trade duties imposed under former president Donald Trump — something President Joe Biden said he is considering and Yellen appears to favor.
“Especially at a time when inflation is high and supply chains are strained… we can see clear benefits in rolling back the tariffs that were introduced over the last 5 years,” Georgieva said in a statement.
However, US Trade Representative Katherine Tai has said the steep tariffs on China offer negotiating “leverage” with Beijing which she is reluctant to give up.
The IMF report said removing tariffs on steel, aluminum, and a range of products from China “would support growth and help reduce inflation.”
The rapid US recovery, helped by low interest rates and hefty government aid, had domestic benefits, reducing poverty and creating more than 8.5 million jobs since the end of 2020, according to the IMF analysis.
It also offered a boost to the pandemic-ravaged global economy, but fund economists cautioned that it will be “tricky” to avoid recession.
“The stakes are clearly high. Misjudging the policy mix — in either direction — will result in sizable economic costs at home and negative outward spillovers to the global economy.”
However, the report pushed back against comparisons to the inflationary era of the 1980s, noting the economy and the central bank actions are “markedly different.”
Biden signs major semiconductors investment bill to compete against China
President Joe Biden signed into law Tuesday a multibillion dollar bill boosting domestic semiconductor and other high-tech manufacturing sectors that US leaders fear risk being dominated by rival China.
The Chips and Science Act includes around $52 billion to promote production of microchips, the tiny but powerful and relatively hard-to-make components at the heart of almost every modern piece of machinery.
Tens of billions of dollars more are allocated for scientific research and development.
The White House says the government commitment to bolstering high-tech industries is already drawing in large-scale private investors, with some $50 billion in new semiconductor investment alone. The lion’s share of that is a plan announced by US firm Micron to put $40 billion into domestic expansion by 2030.
Biden said at a White House speech that the cash injection from the Chips Act will help “win the economic competition in the 21st century.”
Entrepreneurs are “the reason why I’m so optimistic about the future of our country,” he said, and “the Chips and Science Act supercharges our efforts to make semiconductors here in America.”
One of the Democrat’s key themes since he took office has been the need to revamp US leadership in cutting-edge innovation and rebuild the homegrown industrial base in the face of China’s mammoth state-backed investments.
Semiconductors are of particular concern because they are vital to everything from washing machines to sophisticated weapons and nearly all are made abroad.
Although the semiconductor was invented in the United States, the country only produces around 10 percent of global supply, according to the White House, with some 75 percent of US supplies coming from east Asia.
Biden is also counting on the Chips Act to generate enthusiasm among voters, as his Democratic party tries to defend a thin congressional majority from a Republican takeover in this November’s midterm elections.
He told Americans that studies show the expansion of factories will create around a million construction jobs over the next six years — and these will be “union jobs” that pay “the prevailing wage.”
On Wednesday, Biden will sign another bill increasing funding for military veterans exposed to toxins. Like the Chips bill, this won bipartisan support in the usually bitterly divided Congress.
Shortly, Biden is also expected to be signing an enormous domestic investment bill — backed only by Democrats — aimed at fighting climate change and reducing health care costs.
Reflecting on the string of successes in Congress and the sudden momentum for his long stalled agenda, Biden predicted that “people will look back at this week and all we passed, and all we moved on, that we met the moment at this inflection point in history.”
“We bet on ourselves, believed in ourselves and recaptured the story, the spirit and the soul of this nation,” he said.
US regulators clear Boeing to resume 787 deliveries
After more than a year, aviation giant Boeing will be allowed to resume deliveries of its 787 Dreamliner aircraft “in the coming days,” after the company made changes to its manufacturing process, US air safety regulators announced Monday.
Deliveries of the top-selling widebody plane have been halted since spring 2021, so the news will be welcomed by US airlines and travelers who have suffered from massive delays and canceled flights in recent weeks, partly due to the shortage of aircraft.
“Boeing has made the necessary changes to ensure that the 787 Dreamliner meets all certification standards,” the Federal Aviation Administration said in a statement.
The plane’s travails date to late summer 2020, when the company uncovered manufacturing flaws with some jets. Boeing subsequently identified additional issues, including with the horizontal stabilizer.
The difficulties curtailed deliveries between November 2020 and March 2021. Boeing suspended deliveries later in spring 2021 after more problems surfaced.
Acting FAA Administrator Billy Nolen met with safety inspectors in South Carolina last week to confirm they were satisfied with the company’s improvements, which were made to ensure they comply with standards and to identify potential risks after defects were uncovered on the plane.
“The FAA will inspect each aircraft before an airworthiness certificate is issued and cleared for delivery,” the statement said. “We expect deliveries to resume in the coming days.”
– Cleared for takeoff –
A company spokesman told AFP that Boeing will “continue to work transparently with the FAA and our customers toward resuming 787 deliveries,” but did not confirm the firm had received final FAA approval.
During a July 27 earnings conference call, Chief Executive Dave Calhoun described the company was “on the verge” of garnering approval, though he declined to give a precise target date.
At the end of June, Boeing had 120 Dreamliner planes in inventory and was producing the jet “at very low rates,” the company said in a filing.
The company’s stock price gained ground on the news, closing 0.5 percent higher.
Inability to deliver the Dreamliner has dragged down Boeing’s profits, which plunged 67 percent in the second quarter. And the manufacturing changes have led to billions in additional costs for the company.
The firm has delivered just over 1,000 of the planes since it was first introduced in 2004.
The enhanced regulatory scrutiny of the 787 and other Boeing planes comes on the heels of a pair of crashes in 2018 and 2019 on the 737 MAX, which led to aircraft being banned from the skies globally for more than a year.
But the MAX has since returned to service, enabling Boeing to ramp up production of the planes, collect meaningful revenues and announce significant new orders at the Farnborough Airshow earlier this month.
Even so, Boeing’s backlog of orders in the pipeline lags behind that of archrival Airbus.
No recession in Switzerland this year: chief economist
Switzerland does not expect to dip into recession this year despite the threat of an energy supply squeeze, the government’s chief economist said Sunday.
The Swiss economy is “doing well” despite the impact of the war in Ukraine on energy prices, Eric Scheidegger told the SonntagsZeitung newspaper.
He said it was down to companies to steel themselves for the possibility of power shortages in the winter months.
“We may have to revise our economic forecast downwards for next year. The revised forecast will be published on September 20. However, we do not expect a recession for this year,” Scheidegger said.
“We run the risk of an energy supply bottleneck in winter. If there are persistent production interruptions in the EU and we ourselves have a gas shortage, it becomes problematic.
“In our negative scenario, we expect zero growth for 2023 instead of growth of almost two percent.”
Despite the threat of power shortages and the effects of the war in Ukraine, Scheidegger does not see a serious economic crisis heading towards Switzerland.
“At present, the economy is still doing well. Current indicators show that the economy in this country also developed well in the second quarter — after the outbreak of the war in Ukraine,” he said.
“Economic support measures such as general perks or tax relief are currently therefore neither necessary nor helpful,” he added.
– ‘Foreseeable events’ –
Scheidegger said the Swiss economy was less susceptible to high energy prices than other European countries as gas accounted for only five percent of its total energy consumption.
He said the government would discuss possible measures to curb high energy prices in the coming weeks, which could involve reducing health insurance premiums for low-income households.
The State Secretariat for Economic Affairs official said the help for businesses during the Covid-19 pandemic could not become the norm during economic downturns.
“It’s been known since spring that there can be a power shortage in winter. Companies have time to prepare for this,” he said.
“Companies can, and must, take this operational risk into account… it is up to companies to prepare for foreseeable events.”
As for inflation, he said Switzerland was “an island of bliss” compared to the United States, and inflation was likely to fall before the end of the year.
“At 3.4 percent, inflation is much lower here than in other countries. Core inflation — inflation excluding fresh food, energy and fuel — is at two percent,” he said.
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