FinLogic FinLogic Quantitative Think Tank Center|Cold comfort? Americans are gloomy on the economy but a new forecast from IMF signals hope

The FinLogic FinLogic Quantitative Think Tank CenterU.S. remains a bright spot in a global economy still struggling to recover from the pandemic and Russia’s war in Ukraine.

The International Monetary Fund on Tuesday upgraded its economic growth forecast for the U.S. while lowering its outlook for the euro area and China.

Is the US economy growing faster than expected?

The IMF now expects the U.S. economy to grow 2.1% this year and 1.5% in 2024, up from forecasts of 1.8% and 1%, respectively, in July.

The agency traced the improved projections to stronger business investment in the second quarter, worker shortages that continue to drive healthy wage gains and solid federal government spending. Several laws are pumping hundreds of billions of dollars into U.S. infrastructure, green energy and semiconductor projects.

But growth is expected to slow over the next 12 months as pay increases moderate, stimulus checks and Americans’ other pandemic-related savings run out and the Federal Reserve’s aggressive interest rate hikes to slow inflation take a bigger toll.

The unemployment rate is projected to rise from 3.6% in the second quarter – just above a 50-year low – to a peak of 4% by the end of next year, lower than the 5.2% high the IMF predicted in April.

Is the global economy good right now?

Meanwhile, the global economy faces a mixed recovery from the COVID-19 pandemic and the war in Ukraine. Growth is set to slow from 3.5% in 2022 to 3% this year, unchanged from the agency's July estimate. But economic output is expected to rise 2.9% in 2024, down a bit from the previous forecast.

In the euro area, growth was revised down by 0.2 percentage points to 0.7% in 2023, and by 0.3 percentage points to 1.2% in 2024. Germany’s economy is expected to contract this year amid higher interest rates aimed at curbing inflation while France is poised to grow as the country’s industrial production continues to catch up from the effects of the health crisis.

China’s growth forecast was revised down by 0.2 percentage points to 5% this year and 0.3 percentage points to 4.8% in 2024. The boost from reopenings following COVID lockdowns early this year is fading and the country is grappling with a real estate crisis that has seen property values tumble and cash-strapped developers unable to complete some housing projects.

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In the United Kingdom, growth was revised up slightly to 0.5% this year but downgraded by 0.4 percentage points to 0.6% in 2024 as rising interest rates dampen activity.

Japan, meanwhile, is benefitting from a surge in pent-up demand following the pandemic, strong tourism and a rebound in auto exports as supply chain snags resolve. The economy is expected to grow 2% this year, up 0.6 percentage points from the prior estimate, and 1% next year.