By Dow Jones Business News, September 19, 2013, 02:11:00 PM EDT
By Ian Talley
WASHINGTON--Global economic growth remains subdued despite signs of recovery and federal budget cuts are choking U.S.
growth, the head of the International Monetary Fund said Thursday.
"U.S. growth will be more modest this year than we would want, still well below 2%," IMF Managing Director Christine
Lagarde said in prepared remarks to the U.S. Chamber of Commerce.
"Even so, it should accelerate significantly next year, by about one percentage point," she said. The fund chief's
comments come ahead of the latest update of the IMF's World Economic Outlook, due out Oct. 8. In the IMF's July
forecast, the fund said the U.S. would grow by 1.7% this year and 2.7% next year.
Ms. Lagarde said growth is being constrained by federal budget cuts that kicked in earlier this year after lawmakers
failed to reach a budget deal that would have forestalled belt-tightening. The IMF estimates the cuts likely knocked
1.25 to 1.75 percentage points off U.S. growth. The fund has called for lawmakers to repeal the cuts and replace them
with a more gradual deficit-reduction strategy, urging higher revenues and slower growth in spending on Medicare and
other entitlements to put U.S. debt on a more sustainable path.
Instead, Democratic and Republican lawmakers have continued their budget brinkmanship. The two parties are nowhere
close to a budget deal to avert a partial government shutdown when the new fiscal year starts on Oct. 1, or a deal to
lift the federal borrowing limit so the government wont run out of cash to pay all its bills sometime in mid-October.
"Ongoing political uncertainty over the budget and the debt ceiling does not help," Ms. Lagarde said. "It is essential
to resolve this--and the earlier the better--for confidence, for markets, and for the real economy," she said.
Fund staff warn Washington risks sparking a future spike in U.S. borrowing costs if investors lose confidence in the
government's ability to get its deficit and debt under control. Such a U.S. rate shock would have disastrous
consequences for the American and global economies, the fund said.
Lagarde also said the U.S. needs to continue its efforts to bolster financial sector oversight. Despite new
requirements for banks to hold bigger rainy day funds, she said "the system is still not safe enough." Five years ago,
the financial crisis sent the global economy into the worst recession since the Great Depression.
"Policymakers need to turn their attention to the outstanding danger zones, especially derivatives and shadow
banking," she said, referring to largely unregulated financial markets such as hedge fund trading.
The managing director also made the case for U.S. ratification of new governance changes at the fund.
"An effective IMF is important for our global membership and for the U.S.," Ms. Lagarde said.
The Obama administration has been pushing Congress to approve a budget request that would change how the U.S. finances
the IMF and give emerging markets such as China, Mexico and Brazil greater power at the lending institution. The U.S.
Treasury says changes are necessary to preserve American authority at an institution that has played an essential role
in promoting global economic stability amid the crisis.
But, as with many issues, the IMF funding and governance changes have been held up in the budget battles.
Write to Ian Talley at firstname.lastname@example.org
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