The global economy will grow faster than expected this year and next as Donald Trump’s corporate tax cuts provide a short-term shot in the arm, despite fears over rising inequality and overheating financial markets, the International Monetary Fund has said.
Launching its latest World Economic Outlook (WEO) report at the annual Davos gathering of the global elite in Switzerland this week, the IMF upgraded its growth forecast for the world economy by 0.2 percentage points to 3.9% for both 2018 and 2019.
Maurice Obstfeld, the IMF’s economic counsellor, said Trump’s tax cuts, passed into law at the end of last year, should encourage businesses to invest in additional economic output – which should provide a positive, albeit short-lived, boost for the US and its trade partners. However, he said there are risks on the horizon from a potential sharp drop in markets after the recent surge in equity valuations.
He also warned world leaders gathering at the Swiss ski resort that they would need to tackle inequality and boost the resilience of their economies, or face a downturn that will “come sooner and be harder to fight” than expected.
“Political leaders and policymakers must stay mindful that the present economic momentum reflects a confluence of factors that is unlikely to last for long,” he added.
The IMF’s upgrade comes amid a synchronised global upswing, as the economies of the US, the eurozone and Asia recover from the depths of the 2008 financial crisis a decade ago. However, the current economic sweet spot has been helped by central banks around the world keeping interest rates low and pumping billions of dollars into their economies through quantitative easing.
Obstfeld said policymakers could not afford to sit back and enjoy the sunshine, warning that the conditions were not the “new normal” and might fade. Sharply rising inflation could come about as a result of growth in developed nations, while central banks could unsettle financial markets by putting up interest rates more quickly than anticipated.
The US president is due to address the serried ranks of politicians and billionaires on Friday. His tax cuts have been labelled by critics as a gift for rich people, with the fear that bumper corporate profits could simply be used to line the pockets of wealthy shareholders, rather than be reinvested in greater production capacity and higher wages for workers. The IMF said that perhaps the greatest risk to global growth in the future was complacency, urging politicians to look beyond the near-term.
Much of the IMF upgrade to the global growth outlook comes as a result of the tax changes, with the fund anticipating the US economy can now expand at about half a percentage point more than it thought in October. US growth is forecast to accelerate from 2.3% in 2017 to 2.7% this year, before falling back to 2.5% in 2019.
The IMF also revised up its growth estimate for the eurozone, although it said it still anticipates the rate of expansion to fall from 2.4% in 2017 to about 2.2% this year and 2% in 2019.
The IMF held its outlook for growth in the UK to moderate from 1.7% in 2017 to 1.5% this year, while it lowered its forecast for the growth rate in 2019 from 1.6% by 0.1 percentage points to the same level as 2018.