U.S. Tax Overhaul Will Accelerate Global Growth, IMF Says

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The global economy will gain momentum in 2018, driven in large part by recently approved U.S. tax-code changes, according to the latest forecasts of the International Monetary Fund.

World output, adjusted for inflation, will grow 3.9% a year in 2018 and 2019, the strongest since 2011, and an upward revision of 0.2 percentage points from the IMF's forecasts in October.

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When the IMF last released its global economic forecasts, the details of the U.S. tax overhaul weren't finalized, nor was a bill assured of passage. This update thus serves as the IMF's first major estimate of how the tax overhaul will ripple around the world economy -- as a large, but temporary, deficit-fueled fiscal stimulus. The U.S. tax changes are "expected to be responsible for about half of the upward revision to global economic growth over the next two years," the IMF said.

The IMF is releasing its forecasts at an event in Davos, Switzerland, where business leaders and policy makers have gathered for the World Economic Forum. The IMF said growth in 2017 picked up in 120 economies that together account for about 75% of global GDP. The IMF said it was the "broadest synchronized global growth upsurge since 2010" when the world enjoyed a strong, but ultimately fleeting, snapback from the financial crisis.

The most consequential part of the U.S. tax-code change will be the lowering of corporate-income tax rates, which should lead to an acceleration of business investment, the IMF said. The forecast also projected that federal tax revenues will fall more than spending, increasing deficits and acting as a fiscal stimulus that will boost U.S. growth.

The U.S. is expected to grow about 2.7% in 2018, up from an estimate of 2.3% in the previous round of forecasts. The forecast for 2019 now calls for 2.5% growth, up from 1.9%.

That acceleration will spill over to major trading partners, especially to the closest, Mexico and Canada. Thanks largely to the U.S. tax change, Canada's growth will be 0.2 percentage points stronger this year and 0.3 points stronger in 2019, compared with previous estimates. Mexico's economy will be 0.4 points stronger this year and 0.7 points stronger in 2019.

But after that, the bill's near-term focus could become a liability. Many of the bill's provisions are temporary, and their effect will fade. The IMF said economic growth from 2022 onward will likely be weaker than previously estimated for the U.S.

"Our view is that the current upturn, however welcome, is unlikely to become a 'new normal' and faces medium-term downside hazards that likely will grow over time," said Maurice Obstfeld, the IMF's chief economist. "We see several reasons to doubt the durability of the current momentum."

Mr. Obstfeld said that after a couple of years, the world's two largest economies, the U.S. and China, are "predictably headed for slower growth." China is already striving to rein in the growth of credit in its economy, a move that will act to slow China's rapid pace of growth. In the U.S., an "increasing federal debt takes a toll over time," Mr. Obstfeld said.

Write to Josh Zumbrun at Josh.Zumbrun@wsj.com

(END) Dow Jones Newswires

January 22, 2018 09:14 ET (14:14 GMT)