IMF Raises Global GDP Outlook To Highest In 7 Years Thanks To Trump Tax Cuts

Global growth will accelerate to the fastest pace in seven years as U.S. tax cuts spur businesses to invest, the International Monetary Fund says in its latest quarterly update to its World Economic Outlook.

The IMF raised its forecast for world expansion to 3.9% in 2018 and 2019, up 0.2% for both years from its projection in October. That would be the fastest rate of growth since 2011, when the world was bouncing back from the financial crisis.

It is also worth noting to what the IMF attributed its rebound in optimism: according to the DC-based organization, about half of the IMF’s global upgrade stems from the Republican tax cuts passed in December.

This is how the IMF explained its growing optimism about a global recovery:

Global economic activity continues to firm up. Global output is estimated to have grown by 3.7 percent in 2017, which is 0.1 percentage point faster than projected in the fall and ½ percentage point higher than in 2016. The pickup in growth has been broad based, with notable upside surprises in Europe and Asia. Global growth forecasts for 2018 and 2019 have been revised upward by 0.2 percentage point 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 U.S. 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 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. 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 contribute about half of the cumulative revision to global growth over 2018–19.

Broken down by region:

  • United States: IMF sees U.S. expansion at 2.7% this year, 0.4% higher than the fund expected in October. Curiously, the IMF predicts the tax plan will actually reduce U.S. growth after 2022, offsetting earlier gains, as some tax cuts expire and the U.S. tries to curb its budget deficit
  • Eurozone: the IMF sees 2018 GDP growth of 2.2%, up 0.3% from October.
  • Japan: IMF expected 2018 GDP growth of 1.2% in 2018, up 0.5% from October
  • China: GDP will grow 6.6%, the IMF predicts, up 0.1%

The fund left its 2018 forecast for India unchanged from three months ago, at 7.4%; it also kept its UK growth forecast for 2018 at 1.5%, while lowering its 2019 estimate by 1 point to 1.5%.

The full summary table is below (source):



And visually:



What about risks? Here again is the IMF:

Risks to the global growth forecast appear 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. A possible trigger is 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 buildup 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 current cyclical upswing provides an ideal opportunity for reforms. 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.

To summarize:

  • Happy days are here again: Global optimism has returned, and the IMF now expecting nearly 4% growth in 2018 and 2019, up 0.2% from just 3 months ago. That would be the fastest rate since 2011, when the world was bouncing back from the global financial crisis. IMF sees US expansion at 2.7% this year, an increase of 0.4 points from October. The Eurozone forecast is now 2.2%, up 0.3% points while China will expand at 6.6% growth.
  • Thank Trump (for now): half of the IMF’s global upgrade stems from the Republican tax cuts passed in December. And while the economy is set to enjoy the boost from tax cuts in the short term, the IMF predicts the tax plan will actually reduce U.S. growth after 2022, offsetting earlier gains.
  • The UK loses: The UK, alongside India,  was one of the only key economies to have an unchanged forecast. The IMF left the forecast for UK growth unchanged at 1.5%, understandable given Brexit uncertainty persists, while the UK's 2019 forecast was cut by -0.1%.

Finally, the IMF hopes global government will take this period of coordinated growth to implement much needed, and unpopular, reforms. The IMF will be disappointed.