Davos WEF
Davos WEF

IMF says tax overhaul will help boost US and global growth … for now

Key Points
  • 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
Need more broad-based reform worldwide, IMF’s Obstfeld says
Need more broad-based reform worldwide, IMF’s Obstfeld says

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.

Higher US growth, for now

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."

European Central Bank President Christine Lagarde.
Chip Somodevilla | Getty Images News | Getty Images

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.

Risks and reforms

This year, the IMF's midterm economic outlook has coincided with the World Economic Forum (WEF) in Davos, Switzerland, the annual meeting that attracts around 3,000 participants, from world leaders and business heads to public and private policymakers.

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.

Maury Obstfeld, economic counsellor and research department director at the IMF, told CNBC Monday that there was a broad cyclical upswing but many of the factors driving growth were temporary in nature.

"We think that policymakers should not sit back and rest on their laurels (and) think that we're in a new normal where everything will be great. They have to look ahead and look at the broad range of policies that can make growth stronger, and more resilient" he said.

"We like what we're seeing in the short term but the long term picture hasn't changed, the stresses are there. Part of what has supported this recovery since the crisis has been fiscal policy, so we have much higher government debt than we had before, where is the room for governments to do fiscal expansion in a renewed downturn?," he said.

Obstfeld added that the organization sees higher household debt in many places and higher corporate debts. He explained that these are fine when interest rates are low but the recovery itself is leading central banks to raise interest rates. "If that happens abruptly and more quickly than we expect there could be stresses," he warned.

Lagarde says complacency is a risk

Earlier on Monday, IMF Managing Director (and co-chair of WEF this year) Christine Lagarde echoed that view, saying that growth prospects should not lead to complacency.

"Global growth has been accelerating since 2016 and all signs point to a continuous strengthening of that growth this year and next year," Lagarde told a press conference at the event.

"So this is very welcome news … (but) complacency is one of the risks we should guard against," she warned, noting three key reasons why the recovery was not assured.

"First of all, there are still too many people who are left out of that recovery and acceleration of growth. In fact, about one fifth of emerging and developing countries saw their per capita income decline in 2017. The second reason is that this is clearly a mostly cyclical recovery and, absent continuous reforms, the fundamental forces that had us so worried about this new mediocre that we feared, in other words, the scars from the crisis — the low productivity, the ageing population and future potential growth — all of that will continue to weigh on medium-term prospects."

The third reason she noted was that there was a build-up of "potentially serious financial sector vulnerabilities" and that there had been a "troubling" increase in debt across many countries.

Market correction?

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 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."

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