Trump tax cuts will bring short-term global growth surge, says IMF

Davos report says changes will encourage investment but give only a short-lived shot in the arm

people in Hong Kong walk past the latest Hang Seng index figures






The upswing in the global economy is unlikely to last much longer, the IMF said.
Photograph: Anthony Wallace/AFP/Getty Images

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.

Q&A

WEF biggest risks to the global economy 2018

1. Extreme weather events

2. Natural disasters

3. Failure to halt climate change

4. Water crises

5. Cyber attacks

6. Biodiversity loss

7. Mass involuntary migration

8. Manmade environmental disasters

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.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk.

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.

graph

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.

Quick guide

What is Davos?

Davos is a Swiss ski resort now more famous for hosting the annual four-day conference for the World Economic Forum. For participants it is a festival of networking. Getting an invitation is a sign you have made it – and the elaborate system of badges reveals your place in the Davos hierarchy.

For critics, “Davos man” is shorthand for the globe-trotting elite, disconnected from their home countries after spending too much time in the club-class lounge. Others just wonder if it is all a big waste of time.

Who is there?

More than 2,500 people – business leaders, politicians such as Donald Trump, diplomats and the odd celebrity, such as Cate Blanchett – will fly in for the 48th annual Davos meeting. As usual most delegates are men: just 17% of are women. Although the forum boasts delegates from more than 100 countries, most hail from western Europe, followed by the US. The smallest number of delegates come from Latin America and Africa.