IMF criticizes the United States again, discussing deficits, debt, trade, and the banking industry

On Thursday, the International Monetary Fund (IMF) issued unusually harsh criticism against its largest shareholder, the United States, involving the country's deficits, debt, trade rules, and banking regulations. The IMF stated that the U.S. has excessive deficits and debt, and warned of the dangers posed by the country's increasingly aggressive trade policies.

IMF staff summarized their annual assessment of the U.S. economy as follows:

The large fiscal deficit has led to a continuous increase in the ratio of public debt to GDP. The ongoing expansion of trade restrictions and insufficient progress in addressing the vulnerabilities exposed by the 2023 bank failures constitute significant downside risks.

Analysts point out that as the global economic watchdog and lender of last resort, the IMF has been increasingly critical of U.S. economic policies, warning of unsustainable borrowing practices that are creating risks for the global economy.

The IMF projects that under current U.S. policies, the U.S. government debt is expected to exceed 140% of GDP by 2032. The IMF emphasized the urgent need for the U.S. to reverse the trend of rising public debt-to-GDP ratio, as these long-standing fiscal deficits represent significant and persistent policy misalignments that require immediate attention.

Georgieva stated in a press conference on Thursday:

U.S. debt is sustainable, it remains sustainable. Debt levels have risen, deficits have risen. Yes, you can afford it. But if you can bring it down, you will have a stronger path for future development.

This month, the Congressional Budget Office (CBO) raised its estimate of the U.S. budget deficit for this year by 27%, reaching approximately $1.92 trillion. In terms of GDP ratio, the U.S. deficit is expected to expand in the 2024 fiscal year, with the latest estimate at 6.7%, significantly higher than the 5.3% estimated in February, while the average for this ratio in the U.S. over the past half century has been 3.7%. In contrast, EU countries are required to keep this ratio at 3% or below.

Regarding financial stability, the IMF stated in its report that the U.S. has lacked specific actions since the vulnerabilities exposed by a series of bank failures in 2023. The IMF recommended the comprehensive implementation of the Basel III proposals in the U.S., an international agreement reached after the 2008 financial crisis.

IMF is more optimistic about the U.S. inflation situation compared to the Federal Reserve. Georgieva stated on the same day that the IMF expects U.S. inflation to continue cooling down, with core CPI around 2.5% in 2024, and the inflation is expected to return to the Fed's 2% target next year. The Fed should keep rates unchanged at least until later this year, with a possibility of a rate cut this year and further cuts next year.

IMF believes that the U.S. should avoid implementing tariffs and should promote trade activities through dialogue.

IMF slightly lowered its growth forecast for the U.S. economy this year to 2.6%, down by 0.1 percentage point from April's forecast. However, the IMF also stated that the U.S., as the world's largest economy, remains "strong, vibrant, and highly adaptive."

Earlier data on the same day showed that the final values of U.S. GDP and core PCE expenditures for the first quarter were both slightly revised upwards. The final real GDP for the first quarter in the U.S. was 1.4%, a slight increase of 0.1 percentage point from the revised 1.3% value; The core PCE annualized quarter-on-quarter final value rose by 3.7%, a slight upward revision of 0.1 percentage points from the previous value.

Recent data indicates that the U.S. economy is still on track for a soft landing, despite signs of a slowdown. The unemployment rate has slightly increased, retail sales have slowed down, and new home sales plummeted in May. Due to the sluggish business conditions, employment market, and income prospects, consumer confidence weakened this month.

According to a statement from the U.S. Treasury Department, Treasury Secretary Yellen reiterated the importance of candid and comprehensive assessments of all IMF member economies through the annual surveillance process during a meeting with IMF Managing Director Georgieva earlier in the day. The statement also mentioned that when the IMF Board approves the final report next month, it plans to release all documents related to the IMF assessment, including the so-called Article IV review, which includes the U.S. response