US tax cuts will propel growth in the country and its trading partners
IMF revises up global growth forecast as Europe and Asia pick up
The IMF revised up its projections for global economic growth for 2018 and 2019 on the back of an unexpected uptick in Asia and Europe as well as US tax cuts that are set to propel growth in the country along with its trading partners.
The fund now forecasts the global economy growing at 3.9 per cent in 2018 and 2019, up 0.2 percentage points from its October projections. Growth in 2017 is forecast to have reached 3.7 per cent, up 0.1 per cent from October's estimates and half a percentage point higher than 2016.
“The revision reflects increased global growth momentum and the expected impact of the recently approved US tax policy changes,” the fund said. “The effects of the package on output in the United States and its trading partners contribute about half of the cumulative revision to global growth over 2018–19.”
Global growth, which had languished in the previous years, is steaming ahead as the US economy continues to expand at better-than-expected rates and Asia and Europe continue to recover from the economic slump that marred the past years.
The uptick in growth in 2017 was relatively broad-based, with around 120 economies, representing three quarters of world GDP expanding year-on-year last year, “the broadest synchronised global growth upsurge since 2010”, the fund said.
Growth in 2018 and 2019 will be driven by advanced economies, where expansion will exceed 2 per cent in 2018 and 2019, higher than the October projections. Forecasts for emerging and developing economies were unchanged.
“This forecast (for advanced economies) reflects the expectation that favourable global financial conditions and strong sentiment will help maintain the recent acceleration in demand, especially in investment, with a noticeable impact on growth in economies with large exports,” said the fund.
In the US, growth forecasts were revised up to 2.7 per cent in 2018 and 2.5 per cent in 2019, 0.4 percentage points and 0.6 percentage points respectively higher than the October projections.
Donald Trump's US tax cuts will propel this growth, which will taper after 2020 due to the temporary nature of the policy.
“The US tax policy changes are 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,” the fund said.
In the Middle East, the fund revised up its projections for Saudi Arabia, the world's biggest oil exporter where growth will reach 1.6 per cent in 2018 and 2.2 in 2019 thanks to the recovery in the energy market.
However, the fund warned of several risks to global growth, including an asset price bubble as equity markets continue to soar. Other risks include protectionism, particularly as the US, Canada and Mexico renegotiate the North American Free Trade Agreement (Nafta) and the UK looks to exit the European Union.
“Rich asset valuations and very compressed term premiums raise the possibility of a financial market correction, which could dampen growth and confidence,” the fund said. “If financial conditions remain easy into the medium term, with a protracted period of very low interest rates and low expected volatility in asset prices, vulnerabilities could accumulate as yield-seeking investors increase exposure to lower-rated corporate and sovereign borrowers and less credit-worthy households.”