Broad U.S. “sequester” spending cuts that take effect beginning Friday will hurt growth in the world’s largest economy and destabilise a fragile global economic recovery, the International Monetary Fund said on Thursday, warning that the U.S.’s biggest trading partners would be hardest hit.
The IMF added that it will likely trim its growth forecast for the United States and the global economy if the $85 billion in automatic spending cuts, also known as sequestration, take effect on Friday.
The sequestration will affect most industries in the United States and also includes a further $109 billion in cuts over the following eight years.
“Sequestration in the U.S. is one of the key issues of the moment,” IMF spokesman William Murray told reporters in Washington today. “What it means is we’ll have to re-evaluate our growth forecasts in the U.S. and also our other forecasts.”
"Everybody assumes sequestration will take effect," Murray added, warning that the U.S.'s biggest trading partners would be hardest hit.
The IMF is currently projecting the U.S economy will expand 2 percent this year and economists estimate that full implementation of the sequestration will subtract at least 0.5 percentage points from growth.
In February, the nonpartisan Congressional Budget office said economic activity will expand by just 1.4 percent this year because of sequestration, and estimated that there would be 750,000 fewer jobs at the end of 2013 if sequestration remained in place.
The IMF’s revised growth forecast will be published in April in its twice-yearly World Economic Outlook report.
The IMF’s warning about the impact of the spending cuts on the U.S. and the rest of the world comes as Europe continues to struggle with the effects of a debt crisis and as growth has slowed in emerging economies like China, India and Brazil.
“Certainly 2013 will be affected,” Murray said, “We have to see how far this sequestration is implemented, I don’t think that is clear to anybody … because it isn’t an immediate implementation of all spending cuts and we have to see how that political process plays out.”
The full brunt of the automatic cuts will be borne over seven months and Congress can stop them at any time if Democrats and Republicans reach an agreement on budget deficit reduction.
The IMF has long urged the United States – the world's biggest economy – to reach a deal and few believed that the cuts would come into force.
Unable to agree on any other way to reduce the budget deficit, political leaders are pointing fingers at each other now that the spending reductions appear inevitable.
"It is the president's sequester. It was his team that insisted upon it," Republican House of Representatives Speaker John Boehner said.
However, White House spokesman Jay Carney said Republicans' refusal to compromise by agreeing to close tax loopholes on the wealthy was one reason why the cuts might be unavoidable.