IMF Says Less Austerity, More Spending

For those who have stressed the need for austerity and deficit reduction, who think that fiscal cliffs and sequestration are a good corrective to reckless spending, it may be helpful to consider what the IMF is saying. Lowering the outlook for U.S. growth to 1.9% from 2%, IMF Economic Counselor Olivier Blanchard called the U.S. spending cuts, known as the sequester, “the wrong way to proceed.” The U.S., he said, should impose less belt-tightening now, when the economy is still gaining its footing, and more in the future.

Take a look at Europe where the 17 countries using the euro currency remain in recession. Many are cutting spending sharply and raising taxes to slash mountainous debt, but the austerity strategies are stifling growth. The UK is expected to grow 0.7% this year and by 1.5% in 2014 and that’s better than France or Germany. During a recent trip to Europe, U.S. Treasury Secretary Jacob Lew urged officials there to put more near-term emphasis on government spending to stimulate growth, as the U.S. did with its $800 billion stimulus from 2009 to 2011.

The IMF says next year will be better:  3% growth as the effects of the federal cutbacks fade and a housing rebound continues to bolster a strengthening private sector.

The IMF had been calling the global recovery “two-speed,” with emerging markets growing strongly and advanced economies weaker.  Now, it says, it’s a three-speed recovery, with a growing divide between a strengthening U.S. and a still floundering Eurozone.