IMF raises U.S. 2021 growth forecast to 7%, assumes Biden spending plans pass

By David Lawder

WASHINGTON (Reuters) -The International Monetary Fund raised its 2021 U.S. growth projection sharply to 7.0% due to a strong recovery from the COVID-19 pandemic and an assumption that much of President Joe Biden's infrastructure and social spending plans will be enacted.

The IMF's latest forecast, marking the fastest U.S. growth pace since 1984, compares with an April projection of 4.6% growth in 2021. The Fund raised its 2022 U.S. GDP growth forecast to 4.9%, up from its previous 3.5% April forecast.

The new forecasts, contained in the IMF's annual assessment of U.S. economic policies, assume that the U.S. Congress will pass the Biden administration's American Jobs Plan and American Families Plan infrastructure, social spending and tax reform plans this year at a size and composition similar to their original proposals.

IMF Managing Director Kristalina Georgieva said the two packages would implements many recommendations that the IMF has made for the United State for years, including investments to boost productivity, education and to allow more women to join the American workforce.

"They will add to near-term demand, raising GDP by a cumulative 5.25% over 2022 to 2024," Georgieva told a news conference, adding that they will also produce a lasting improvement in income and living standards, with a 1% increase in GDP output even after 10 years.

The IMF forecast came shortly after the Congressional Budget Office offered a similarly optimistic forecast for the U.S. economy this year. The non-partisan CBO's forecast makes no assumption about the fate of Biden's spending plans and is based only on current laws.

"Indicators suggest significant labor market slack remains which should serve as a safety valve to dampen underlying wage and price pressures," the IMF said in its review statement.

The Fund added that it expects U.S. inflation expectations to remain well-anchored, but these "will be obscured in the coming months by significant, transitory movements in relative prices," which could cause personal consumption expenditure inflation to peak temporarily near to 4% later this year.

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The IMF said the United States should prioritize its spending toward programs with the biggest impact on boosting productivity, increasing labor force participation, reducing poverty and aiding a transition from carbon.

It said the United States should use tax policy to further these goals, scaling back poorly targeted tax expenditures and raising federal fuel taxes and introducing other carbon taxes.