IMF upgrades US growth forecast on Trump tax and spending plans

THE INTERNATIONAL Monetary Fund on Monday said the US economy would grow faster than previously expected in 2017 and 2018 based on the incoming Trump administration’s tax and spending plans, but it kept its global growth forecasts unchanged due to weakness in some emerging markets.

Updating its World Economic Outlook, the IMF forecast overall global growth at 3.4 per cent for 2017 and 3.6 per cent for 2018, unchanged from October. That compared to 3.1 per cent in 2016, the weakest year since the 2007-2009 financial crisis.

It estimated a modest fiscal stimulus under US President-elect Donald Trump would push US gross domestic product growth to 2.3 per cent in 2017, a gain of 0.1 percentage point on the last forecast, and to 2.5 per cent in 2018, up 0.4 percentage point.

The IMF noted, however, that Trump’s plans for expansionary fiscal measures including tax cuts and infrastructure spending also could stoke inflation in an economy already nearing full employment.

“If a fiscally-driven demand increase collides with more rigid capacity constraints, a steeper path for interest rates will be necessary to contain inflation, the dollar will appreciate sharply, real growth will be lower, budget pressure will increase, and the US current account deficit will widen,” IMF chief economist Maurice Obstfeld said in a statement.

That would increase the likelihood of more protectionist US trade measures and retaliatory responses, Obstfeld told a news conference. “In that scenario, all countries would lose out,” he added.

But the new IMF outlook does not include any assumptions regarding Trump’s trade plans, such as potential tariffs on Mexican and Chinese goods, as there seems to be less of a political consensus surrounding them, Obstfeld said.

While stronger oil and commodity prices have improved the picture for oil exporters including Nigeria, higher interest rates and tighter financial conditions will negatively affect many emerging market economies, including Mexico and Brazil.

The IMF cut Mexico’s growth forecasts by 0.6 percentage point in both 2017 and 2018, citing a consumer spending pullback amid worries about Trump’s trade policies.

The IMF raised its 2017 forecasts for the euro zone and Japan by 0.1 percentage point each, largely because of stronger-than-expected results in the second half of 2016. Britain’s forecast was increased 0.4 percentage point, but its 2018 growth was reduced by 0.3 percentage points.

The IMF said the risks were tilted to the downside, with potential factors including protectionist policies, tighter financial conditions, banking system stress in Europe and increased geopolitical tensions.