The International Monetary Fund has raised its forecasts for world economic growth for this year and next on the back of president Trump’s tax reforms in America, but remains gloomy about the UK.
In an update to its World Economic Outlook, the Washington-based institution said that Mr Trump’s corporate overhaul should boost investment in the US and provide a fillip to its main trading partners.
In what the fund described as the “broadest synchronised global growth upsurge since 2010”, the IMF revised up its forecast for global growth to 3.9 per cent for both 2018 and 2019, 0.2 percentage points higher than the IMF’s most recent update in October.
Christine Lagarde, the managing director of the IMF, said: “Global growth has been accelerating since mid-2016, and all signs point to a further strengthening both this year and next. This is very welcome news.”
However, the IMF said that the UK is likely to trail behind other advanced economies due to Brexit uncertainty, having led the pack as recently as 2016.
Advertisement
It forecasts that the UK economy will expand by 1.5 per cent in 2018 and 2019, marking a 0.1 percentage point downgrade for 2019. Official figures due next week from the Office for National Statistics are expected to show the UK expanded by 1.7 per cent in 2017, a drop from 1.9 per cent in 2016.
Economic growth in the UK has been slowing since the start of 2017, as Brexit uncertainty limits business investment and the rise in inflation squeezes consumer spending. However, Britain’s manufacturing sector is expanding at the fastest pace in almost seven years due to the fall in the pound and a stronger global growth.
The IMF said a key reason for greater global growth would be the recently-implemented US tax cuts, which will 1.2 per cent to the world’s biggest economy by 2020.
Mr Trump secured his first big legislative victory in December when he won Republican approval for tax cuts worth $1.5 trillion. Under the package, which prompted a string of US businesses to sign off big spending commitments in the US and gift their staff with share packages, the corporate tax rate was cut from 35 per cent to 21 per cent.
Maurice Obstfeld, the IMF’s chief economist, said that the tax cuts would probably increase the size of the US current account deficit and strengthen the value of the US dollar. The IMF also warned that growth in the US would probably start to weaken after 2022 as short-term spending incentives that were prompted by the tax cuts begin to come to an end.
Advertisement
“The US 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 IMF said in the update, which was released on the sidelines of the World Economic Forum in Davos, Switzerland.
Economic activity in Europe and Asia in the past year has been stronger than expected, the IMF said, increasing its forecast for worldwide economic growth for last year by 0.1 percentage points compared with October to 3.7 per cent as a result.
For the current year, the US economy is expected to expand by 2.7 per cent against its 2.3 percent October projection before growth slows to 2.5 per cent in 2019.
Eurozone growth is also expected to be higher, driven by Germany, Italy and the Netherlands, the IMF said, although it cut its forecast for growth in Spain for this year, citing political uncertainty sparked by the prospect of independence for Catalonia.
The Fund revised up its growth forecast for Japan but maintained its predictions for the emerging markets and developing economies. The fund reckons the Chinese economy will grow by 6.6 per cent this year, below the target that Beijing is expected to set, before slowing to 6.4 per cent in 2019.