The International Monetary Fund (IMF) has revised global growth forecasts for 2018 and 2019 upwards, saying the revision is partly down to the recently approved overhaul of the U.S. tax system under President Donald Trump.
Global growth forecasts for 2018 and 2019 have both been revised upward by 0.2 percentage points to 3.9 percent. “The revision reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes,” the IMF said in its World Economic Outlook report, published Monday ahead of the World Economic Forum in Davos, Switzerland.
An overhaul of the U.S. tax system was approved in December 2017 and has been broadly viewed as a legislative victory for Trump in his first year in office.
The changes saw the corporate tax rate drop from 35 percent to 21 percent and are predicted to boost consumer spending and U.S. growth, although its critics believe it will add $1.5 trillion to the U.S. deficit and would increase the wealth gap between rich and poor.
The IMF said Monday that the tax changes were expected to stimulate activity “with the short-term impact in the United States mostly driven by the investment response to the corporate income tax cuts.”
It added that “the effect on U.S. growth is estimated to be positive through 2020, cumulating to 1.2 percent through that year, with a range of uncertainty around this central scenario.”
However, it noted that “due to the temporary nature of some of its provisions, the tax policy package is projected to lower growth for a few years from 2022 onwards.”
The effects of the package on output in the United States and its trading partners contributed about half of the cumulative revision to global growth over 2018–19, the IMF said.
Looking at the global economy, the Fund noted that “global economic activity continues to firm up” and is estimated to have grown by 3.7 percent in 2017, which is 0.1 percentage points faster than projected in the fall. The pickup in growth has been broad based, with “notable upside surprises” in Europe and Asia.
The Fund noted that risks to the global growth forecast appeared broadly balanced in the near term, but remain skewed to the downside over the medium term.
“On the upside, the cyclical rebound could prove stronger in the near term as the pickup in activity and easier financial conditions reinforce each other. On the downside, rich asset valuations and very compressed term premiums raise the possibility of a financial market correction, which could dampen growth and confidence,” the report said.
A possible trigger for a market correction was, the Fund said, a faster-than-expected increase in advanced economy core inflation and interest rates as demand accelerates.
“If global sentiment remains strong and inflation muted, then financial conditions could remain loose into the medium term, leading to a build-up of financial vulnerabilities in advanced and emerging market economies alike. Inward-looking policies, geopolitical tensions, and political uncertainty in some countries also pose downside risks.”
The report comes as world leaders and business heads convene at the World Economic Forum. The annual meeting aims to “improve the state of the world” and encourage joint action to solve some of the world’s biggest problems, such as climate change and poverty.
The IMF encouraged a shared endeavour among economies to make reforms, saying on Monday that the current cyclical upswing provided a good opportunity to do so.
“Shared priorities across all economies include implementing structural reforms to boost potential output and making growth more inclusive. In an environment of financial market optimism, ensuring financial resilience is imperative.
“Weak inflation suggests that slack remains in many advanced economies and monetary policy should continue to remain accommodative. However, the improved growth momentum means that fiscal policy should increasingly be designed with an eye on medium-term goals — ensuring fiscal sustainability and bolstering potential output. Multilateral cooperation remains vital for securing the global recovery.”