The global economy will grow faster than expected this year and next as Donald Trump’s corporate tax cuts provide a short-term shot in the arm, despite fears over rising inequality and overheating financial markets, the International Monetary Fund has said.
Launching its latest World Economic Outlook (WEO) report at the annual Davos gathering of the global political and business elite in Switzerland this week, the IMF upgraded its growth forecast for the world economy by 0.2 percentage points to 3.9% for both 2018 and 2019.
Christine Lagarde, the IMF’s managing director, said there were encouraging signs a decade on from the financial crisis, although she warned that too many people were being left out of the recovery.
Lagarde also warned global leaders against complacency despite the boom in growth, employing the words of John F Kennedy – also used by former British chancellor George Osborne – that the “time to repair the roof is when the sun is shining”.
She said a fifth of emerging and developing countries had seen income per head decline in 2017, and argued for countries to retrain workers displaced by technologies and globalisation. “We are quite upbeat for immediate future, but what we’re seeing in the more medium term gives us ground for worry,” she added.
Trump’s tax cuts, passed into law at the end of last year, should encourage businesses to invest in additional economic output – which the IMF said should provide a positive, albeit short-lived, boost for the US and its trade partners. But it also said there were risks on the horizon from a potential sharp drop in markets after the recent surge in equity valuations.
Maurice Obstfeld, the IMF’s economic counsellor, warned leaders gathering at the Swiss ski resort that the next economic downturn could “come sooner and be harder to fight” than expected. “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 added.
The IMF’s upgrade comes amid a synchronised global upswing as the economies of the US, the eurozone and Asia recover from the depths of the 2008 financial crisis. However, the current economic sweet spot has been helped by central banks around the world keeping interest rates low and pumping billions of dollars into their economies via quantitative easing.
Obstfeld said the conditions were not the “new normal” and might fade. A sharp rise in inflation could come about as a result of growth in developed nations, while central banks could unsettle financial markets by putting up interest rates more quickly than anticipated.
The US president is due to address the ranks of politicians and billionaires on Friday. His tax cuts have been labelled by critics as a gift for rich people, with the fear that bumper corporate profits could simply be used to line the pockets of wealthy shareholders rather than be reinvested in greater production capacity and higher wages for workers.
Much of the IMF upgrade to the global growth outlook comes as a result of the US tax changes, with the fund anticipating that the US economy can now expand at about half a percentage point more than it thought in October. US growth is forecast to accelerate from 2.3% in 2017 to 2.7% this year, before falling back to 2.5% in 2019.
The IMF said that effects of the cut would begin to fade from 2022, as temporary spending incentives for firms began to expire. It also revised up its growth estimate for the eurozone, though it said it still anticipated the rate of expansion to fall from 2.4% in 2017 to about 2.2% this year and 2% in 2019.
While the world economy benefits from a global upswing, the IMF held its outlook for growth in the UK, forecasting the rate of GDP expansion to moderate from 1.7% in 2017 to 1.5% this year. It also lowered its forecast for 2019 from 1.6% by 0.1 percentage points to the same level as 2018.