The global economy is now expected to expand nearly 4 percent, due in large part to U.S. tax reform, but that positive economic momentum isn’t likely to last in the long term, the IMF said.
In its updated Global Economic Outlook report, released January 22, the IMF revised its previous international economic output estimates for 2018-2019 upward by 0.2 percentage points, to 3.9 percent. Half of that growth was attributed to the projected effect of the Tax Cuts and Jobs Act (P.L. 115-97) on the United States’ output, as well as its spillover effects on U.S. trading partners, the IMF said.
Domestically, U.S. tax law is expected to lead to greater short-term economic activity, driven primarily by a surge in investments following the corporate income tax cut from 35 percent to 21 percent. U.S. growth is now expected to increase to 2.7 percent in 2018, up from the previous estimate of 2.3 percent, the IMF said. The U.S. is also projected to experience growth of 2.5 percent in 2019, up from 1.9 percent. Cumulative growth will be 1.2 percent higher by 2020 than in an alternative scenario without the tax policy changes, the IMF added.
However, because many provisions in the Tax Cuts and Jobs Act are temporary, the U.S. is projected to experience lower growth starting in 2022, according to the report.
The tax bill and its effects are quite complex, so there is much uncertainty around the organization’s estimates, said Maurice Obstfeld, the IMF’s economic counselor and director of research, while presenting the report’s new findings at a press conference on the sidelines of the Davos World Economic Forum.
Since some of the features of the tax bill are explicitly temporary, the IMF does expect there will be some payback once those features run out, Obstfeld said, although some features, such as the corporate tax cut and the move to a territorial system, are permanent. The IMF also incorporated in its forecast the "pay as you go" rules that would require government expenditure cuts as the deficit grows, but it’s unclear whether the U.S. will relax or enforce those provisions, Obstfeld added.
“There’s certainly some potential for the payback in U.S. growth to result in slower import growth in the U.S., which would affect trading partners,” Obstfeld said. “That’s somewhat symmetric with what’s happening in the current year, but how big those effects would be, how the overall picture would look, is very hard to predict.”
In general, about 120 economies — accounting for three-quarters of the world’s GDP — saw accelerated year-on-year growth in 2017, including the United States, as well as Japan and Germany, whose growth rates for 2018 and 2019 have also been revised upward, according to the IMF. In emerging and developing countries in Asia, growth is expected to increase by about 6.5 percent over 2018-2019, and in Latin America, growth is expected to hit 1.9 percent in 2018 and 2.6 percent in 2019, mostly because of improved projections for Mexico that stem from stronger U.S. demand, the report says.
Although it is very welcome news that all signs are pointing to greater economic growth in 2018-2019, governments should not be complacent, warned IMF Managing Director Christine Lagarde during the press conference.
“We certainly should feel encouraged, yet we should not feel satisfied,” Lagarde said, pointing to the IMF’s findings that one-fifth of emerging markets and developing countries experienced declines in per capita income in 2017.
She also noted that the growth, while higher, is mostly cyclical. “Absent reforms, the fundamental forces that had us worried about the ‘new mediocre’ — and future growth potential — will remain in place,” Lagarde added. There also remains significant uncertainty in the coming year because of major weak spots, including a troubling increase in deficits across many countries, she said.
“The time to repair the roof is when the sun is shining,” Lagarde said, urging governments to take action to increase long-term, more inclusive growth, pay down debts, and focus on strong international cooperation on such issues as tackling tax evasion. “This week is a perfect opportunity for world leaders to focus on those repairs.”