The IMF now expects the world’s largest economy to grow by 2% in 2014, down from its April expectations of 2.8%. It has attributed the cut to a weak Q1, pulled down by an unusually harsh winter which was reflected in a drawdown in inventories, softer employment numbers and a sluggish housing market.
As a sign of confidence that its economic recovery is on track, the IMF kept its 2015 forecast unchanged at 3%. However, the IMF noted that in order to support the growth momentum, the US will need to increase its minimum wage and invest on its infrastructure.
The fund had earlier trimmed its forecast in April, pointing to the Ukraine crisis and the slowdown in major emerging economies. Its lowered forecast follows a similar revision by the World Bank last week, which cut its forecast to 2.1% from 2.8%, largely based on the same factors.
What does it mean for markets
The IMF doesn’t expect to see full employment in the US until the end of 2017, amid low inflation. They believe that means there’s more than enough room for interest rates to be kept near zero beyond the mid-2015 date expected by markets.
In April, the Federal Reserve signalled it would cut back its monthly bond-buying programme by $10 billion to $45 billion. The tapering of its bond-buying is expected to continue towards the end of the year as it winds down its third quantitative easing (QE) programme.
The current low interest rate environment, along with a stream of positive indicators for the US economy has already helped fuelled the recent run up in US equities. The discussion that interest rates could be kept low longer-than-expected might continue to support stocks in the near term.
However, with a risk of a market correction as seen in the ending of previous QE programmes, defensive stocks such as utilities and telcos may be the best positioned to hold on to their gains if that happens.
Outlook for Singapore market
However, the surprise plunge in Singapore’s exports for May announced this morning could weigh on investors sentiment. Non-oil domestic dipped at -6.6% year-on-year against the market expectations of a rise of 0.5%. This was led by a worse-than-expected slide in the electronics sector which shrunk at -15.3%, instead of market estimates of -7.4%.