WASHINGTON, July 23 (Xinhua) -- The International Monetary Fund (IMF) cut its forecast for U.S. economic growth this year to a " disappointing 1.7 percent", down from its June estimate of 2 percent, according to the final version of its annual review of the U.S. economy released Wednesday.
The IMF forecasted the unemployment rate would stand at 6.4 percent this year, and inflation would be 1.8 percent. Interest rate would rise from this year's 0.1 percent to 0.3 percent and 1. 2 percent in the next two years.
An unusually harsh winter, with an inventory correction, a still-struggling housing market and slower external demand, led to a contraction of 2.9 percent of the U.S. economy in the first quarter.
A broad-based improvement appears to be unfolding as evidenced by stronger employment and industrial production numbers and stronger growth is expected to be underpinned by a continuation of accommodative monetary policy, a substantial reduction in the fiscal drag, and improved labor and housing conditions, the report said.
Economic growth would accelerate to 3 percent in 2015, propelled by strong consumption growth, a declining fiscal drag, a pickup in residential investment, and easy financial conditions, it noted.
"Risks around this outlook include slowing growth in emerging markets, oil price spikes related to events in Ukraine and Iraq, and earlier-than-expected interest rate rises," it said. However, as confidence in the recovery picks up, nonresidential investment could grow more than expected and labor force participation could bounce back.
In the case of a slow progression toward full employment and continued subdued inflation, IMF said, interest rates could stay at zero for longer than currently anticipated so long as inflation expectations remain firmly anchored.
"The recent shift to qualitative forward guidance provides the Federal Reserve with greater flexibility but puts an even higher premium on clear and systematic communication to guide expectations," it said.
In the medium term, IMF said potential growth is forecast to average just above 2 percent for the next several years, significantly below the historic average growth rate.
"This downgrade reflects the effects of an aging population and more modest prospects for productivity growth. This makes it critical for the authorities to take immediate steps to raise productivity, encourage innovation, augment human and physical capital, and increase labor force participation," it said.
The IMF called for wide-ranging measures in such areas as investments in infrastructure and education, a comprehensive tax reform, active labor market policies, and a skills-based approach to immigration reform. An expansion of the Earned Income Tax Credit, possibly complemented by a higher minimum wage, would help address poverty and inequality while promoting labor participation.