The broad US "sequester" spending cuts that take effect beginning Friday will slow growth in the world's biggest economy and hit the global economy, the International Monetary Fund said Thursday. "There will be an impact on global growth," IMF spokesman Bill Murray said. "We'll have to re-evaluate our growth forecast for the United States and also our other forecasts."
Murray emphasised that the $85 billion in US spending cuts, known as sequestration, would be phased in over seven months. The sequestration also includes $109 billion in cuts over the following eight years. The drastic cuts were mandated after Democrats and Republicans failed to reach an agreement on budget deficit reduction. "It's really going to affect US growth," Murray said. "We have to see how deeply the spending cuts are implemented."
The IMF's current US growth forecast for 2013 is 2.0 percent and economists expect that full implementation of the sequestration will subtract at least 0.5 percentage points from growth. IMF's revised growth forecasts will be reported in April in its twice-yearly World Economic Outlook report. As for the sequester's impact on global growth, Murray said, "The countries most affected will be countries that have active trade relations with the United States."
US lawmakers still have a few hours to strike a deal that would avert the spending cuts that begin Friday, but that appeared unlikely. "Everybody assumes sequestration will take effect," Murray said. The across-the-board spending cuts were expected to batter the country's slow recovery from the severe recession that ended in mid-2009. According to Commerce Department data published Thursday, the US economy stalled in the 2012 fourth quarter, growing a mere 0.1 percent pace - though better than the previous estimate of a slight contraction.
But overall growth in 2012 was 2.2 percent. Scott Hoyt of Moody's Analytics said the scant growth in the fourth quarter "highlights the impact the budget negotiations in Washington and weakness of overseas economies have had on the US economy." The Congressional Budget Office forecasts US gross domestic product growth will slow to just 1.4 percent in 2013 if the sequester takes place in full.
It said that was too slow to spur businesses to hire additional workers, keeping the unemployment rate near 8.0 percent. Federal Reserve Chairman Ben Bernanke, in testimony to Congress Tuesday and Wednesday, warned that economic growth remained uneven and could be further hurt by the government's steep budget cuts.
"The Congress and the administration should consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually," he said. Bernanke reaffirmed that the Fed's extraordinary $85 billion a month bond-purchase program, aimed at holding down long-term interest rates and encouraging investment, was still merited.
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