IMF sees brighter global prospect, optimistic markets on U.S tax policy changes
Bukola Odufade is Businessamlive Reporter.
You can contact her on email@example.com with stories and commentary.
January 22, 20181.4K views0 comments
The International Monetary Fund (IMF) has revised its forecast global growth by 0.2 percentage points to 3.9 percent in 2018/19 on increased global growth momentum and new U.S tax policy changes. It, however, had modest growth upgrade for Nigeria in the two-year forecast horizon.
The Bretton Woods institution, in its World Economic Outlook Update, January 2018, released Monday, January 22, sees a brighter global prospect and optimistic markets majorly on the positive impact of the recently approved U.S tax policy changes.
It noted that global economic activity has continued to firm up since mid-2016 and that output is estimated to have grown by 3.7 percent in 2017, which is 0.1 percent faster than projected in the fall and 0.5 percent higher than in 2016.
For the two-year forecast horizon, it said the upward revisions to the global outlook result mainly from advanced economies, where growth is now expected to exceed 2 percent in 2018 and 2019.
This forecast, according to the outlook, reflects the expectation that favorable global financial conditions and strong sentiment will help maintain the recent acceleration in demand, especially in investment, with a noticeable impact on growth in economies with large exports.
In addition, the IMF said the U.S. tax reform and associated fiscal stimulus are expected to temporarily raise U.S. growth, with favorable demand spillovers for U.S. trading partners—especially Canada and Mexico—during this period. The expected global macroeconomic effects account for around one-half of the cumulative upward revision to the global growth forecast for 2018 and 2019, with a range of uncertainty around this baseline projection.
“The pickup in growth has been broad-based, with notable upside surprises in Europe and Asia. Global growth forecasts for 2018 and 2019 have been revised upward by 0.2 percentage point to 3.9 percent. The revision reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes,” it said, adding that the growth pickup in sub-Saharan Africa (from 2.7 percent in 2017 to 3.3 percent in 2018 and 3.5 percent in 2019) is broad as anticipated in the fall, with a modest upgrade to the growth forecast for Nigeria but more subdued growth prospects in South Africa, where growth is now expected to remain below 1 percent in 2018–19, as increased political uncertainty weighs on confidence and investment.
Specifically the IMF stressed that the U.S. 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, adding that the effect on U.S. growth is estimated to be positive through 2020, cumulating to 1.2 percent through that year, with a range of uncertainty around this central scenario.
“Due to the temporary nature of some of its provisions, the tax policy package is projected to lower growth for a few years from 2022 onwards. The effects of the package on output in the United States and its trading partners contribute about half of the cumulative revision to global growth over 2018–19.”
It equally sees risks to the global growth forecast appearing broadly balanced in the near term, but remain skewed to the downside over the medium term.
“On the upside, the cyclical rebound could prove stronger in the near term as the pickup in activity and easier financial conditions reinforce each other.
“On the downside, rich asset valuations and very compressed term premiums raise the possibility of a financial market correction, which could dampen growth and confidence. A possible trigger is a faster-than-expected increase in advanced economy core inflation and interest rates as demand accelerates,” it stated.
Read also: World Bank withdraws support for oil, gas industries
The IMF noted that if global sentiment remains strong and inflation muted, then financial conditions could remain loose into the medium term, leading to a buildup of financial vulnerabilities in advanced and emerging market economies alike.
It added that inward-looking policies, geopolitical tensions, and political uncertainty in some countries also pose downside risks.
“The current cyclical upswing provides an ideal opportunity for reforms. Shared priorities across all economies include implementing structural reforms to boost potential output and making growth more inclusive. In an environment of financial market optimism, ensuring financial resilience is imperative.
“Weak inflation suggests that slack remains in many advanced economies and monetary policy should continue to remain accommodative. However, the improved growth momentum means that fiscal policy should increasingly be designed with an eye on medium-term goals—ensuring fiscal sustainability and bolstering potential output. Multilateral cooperation remains vital for securing the global recovery,” it said.