Sugar high from Trump's tax cuts to help boost world economy says IMF

Jasper Jolly
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The IMF warned Donald Trump's tax cuts may only rovide a short-term boost (Source: Getty)

The International Monetary Fund (IMF) has today unveiled a big upgrade to its global economic forecasts, driven by stronger recent growth and an impending sugar rush from US tax cuts.

World GDP growth will hit 3.9 per cent this year and next, the highest since 2010 and a 0.2 per cent upgrade from forecasts only made in October, the IMF told business and political leaders at the World Economic Forum in Davos, Switzerland.

Christine Lagarde, the IMF's managing director, warned the current "broad-based growth momentum" is "mostly cyclical".

"Absent reforms, the fundamental forces that had us worried about the 'new mediocre' – and future growth potential – will remain in place," she said.

The biggest upgrade has come from the giant US economy, which will see tax cuts passed by US President Donald Trump’s Republican party push GDP 1.2 per cent larger by 2020 than predicted previously.

The new IMF forecasts

2016 2017 2018 2019 2018 difference from prior forecasts 2019 difference from prior forecasts
World output 3.2 3.7 3.9 3.9 0.2 0.2
Advanced economies 1.7 2.3 2.3 2.2 0.3 0.4
United States 1.5 2.3 2.7 2.5 0.4 0.6
Euro Area 1.8 2.4 2.2 2 0.3 0.3
United Kingdom 1.9 1.7 1.5 1.5 0 –0.1

The IMF last updated its global economic forecasts in October 2017 (Source: IMF World Economic Outlook Update)

US companies have had their headline corporate tax rate slashed from 35 per cent to 21 per cent, while other temporary investment incentives have also been brought in.

Maurice Obstfeld, IMF director of research, will say that Trump’s tax changes will “contribute noticeably to US growth over the next few years, largely because of the temporary exceptional investment incentives that it offers.”

Read more: 2018 could be last hurrah for strong global growth World Bank warns

However, he cautioned the tax cuts are a “short-term growth boost” which will widen the US current account deficit and strengthen the dollar – an outcome which Trump has previously said harms the US by making manufacturers less competitive.

Indeed, the benefits of the tax cut will be “paid back partially later in the form of lower growth”, Obstfeld added. The IMF’s analysis also showed that upper income households will enjoy the bulk of the medium-term benefits of the Trump tax cuts.

The strong Eurozone has also been an impressive contributor, carrying on its resurgence in recent months. Growth will be 0.3 per cent stronger this year and next, the IMF said.

Economists were also surprised by a recent pick-up in investment in advanced economies, which has boosted trade in Japan, South Korea, and Germany, as well as the US. However, UK economic prospects were marked down marginally, with growth of 1.5 per cent predicted this year and next.

Read more: Economists await a tale of two economies in the UK and Europe

Obstfeld said the improvement in growth is “good news”, but warned against complacency in a strengthening environment which may end up being short-lived.

“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 said.

“The next recession may be closer than we think, and the ammunition with which to combat it is much more limited than a decade ago, notably because public debts are so much higher,” Obstfeld said.

The current upturn – fuelled by loose monetary policy and more spending by governments – is likely to face growing risks of stuttering, the IMF said. A tightening of financial conditions could see a risk of “disruptive price adjustments” in highly valued stock markets, it added.

Read more: The greater a market’s valuation, the smaller the likely future returns

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