Global growth forecast boosted by Trump's tax, spending promises

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The global economy has been chugging along in low gear for the last few years, but the prospect of a big boost in government spending, an idea put forward by President-elect Donald Trump, could help it pick up speed.

That's prompted the Organisation for Economic Co-operation and Development, a Paris-based think tank, to raise its global economic forecast Tuesday.

The most recent signs that the U.S. economy is gaining strength came from the latest government data, which showed that growth was faster than initially thought in the third quarter. The Commerce Department boosted its estimate of third-quarter gross domestic product to a 3.2 percent annual rate, up from the previous estimate of 2.9 percent.

Economists were especially encouraged by an even bigger boost in real gross domestic income, an alternative measure of the economy, which surged at a 5.2 percent annual rate. Corporate profits were up by 6.6 percent.

The latest overall growth, the best in two years, was helped by strong consumer spending and a one-time surge in soybean exports.

Consumers have been largely responsible for keeping the economy moving ahead, as businesses have cut back on spending and investment and net exports have been weak. Tight-fisted federal, state and local budgets have also kept government spending in check.

For now, the health of the U.S. economy will depend on consumers continuing to spend. That seems likely as long as unemployment remains low and tight labor markets continue to push wages higher.

And after a nail-biting presidential election campaign, the resolution of that major unknown seems to have boosted consumer confidence, according to the latest survey Tuesday from the Conference Board. The Consumer Confidence Index hit 107.1 in November, up from 98.6 in October, according to data from the Conference Board on Tuesday, the highest since July 2007.

"Despite the fact that Hillary Clinton won the popular vote, this report provides further evidence to suggest that the shock win for Donald Trump has had a positive impact on sentiment," said Andrew Hunter, U.S. economist at Capital Economics.

It remains to be seen whether the other major economic sources of growth — business investment, exports and government spending — now kick in. But Trump's promises to cut taxes and spend big on infrastructure have some forecasters raising their estimates.

Faced with subpar growth, other countries are also considering boosting government spending, thanks in part to the low cost of borrowing. That stimulus would also help spur other major economies, including China, Europe and Japan.

With that additional spending, the OECD estimated that global growth would accelerate from 2.9 percent this year to 3.3 percent in 2017 and reach 3.6 percent in 2018.

In the U.S., President-elect Trump has pledged to boost GDP growth to at least 4 percent a year, a goal that some economists see as a bit optimistic. The OECD, in its latest forecast, said it expects U.S. growth would pick up in 2018 to 3.0 percent, the highest rate since 2005.

That would drive unemployment in the world's largest economy down from 4.9 percent this year to 4.5 percent in 2018, the OECD estimated.

China, which is not a member of the 35-country OECD, was seen slowing from growth this year of 6.7 percent to 6.4 percent in 2017, both slightly better than the last forecast in May.

Europe is expected to continue to see weak growth of just 1.7 percent this year and 1.6 percent in 2017. Japan will also continue see its economy tread water, with growth of just 0.8 percent this year and 1.0 percent in 2017. Both those estimates a bit better than the OECD's last forecast.

Over the longer run, though, a pickup in growth could create headwinds that limit how fast the economy can expand.

A tightening labor market has already begun pushing wages higher, which raises the risk of higher inflation. That in turn, would force interest rates higher, creating something of a brake on spending and investment. Long-term interest rates have already moved higher since Trump's election as bond market investors anticipate inflation picking up.

A strong U.S. economy would also continue to push the dollar higher, which would make U.S. exports of goods and services less competitive around the world. Export growth could also be dampened if the incoming Trump administration follows through on threats to impose tariffs and trade restrictions on major U.S. trading partners like Mexico and China.