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IMF Raises Global Growth Forecast on US Tax Cuts, But Warns of Recession

The International Monetary Fund (IMF) warns policymakers to be on guard for the next recession, though it believes the US tax cuts will spur investment and expedite global growth to the fastest pace in seven years. 

The Fund raised its forecast for world expansion to 3.9% this year and next, up 0.2 of a percentage point for both years, from its projection in October. That would be the fastest rate since 2011, when the world was bouncing back from the financial crisis, says Bloomberg.

The faster recovery offers a “perfect opportunity now for world leaders to repair their roof,” IMF Managing Director Christine Lagarde was quoted in the report as saying in Davos, Switzerland where the World Economic Forum is meeting.

About half of the IMF’s raised forecast stems from the US’s tax cuts passed in December and enacted this year, according to the report.

IMF was cited as saying that cuts to the corporate tax rate will lift US GDP growth to 2.7% this year, 0.4 of a percentage point higher than the IMF expected in October.

Tax cut to reduce US growth after 2022

However, the IMF also forecast that the tax cut will reduce the country’s growth after 2022, and offset earlier gains because some individual cuts expire while the US tries to curb its budget deficit, the report says.

In addition, the U.S’s current-account deficit will increase as stronger demand drives imports, the report adds.

The IMF also warns on a possible financial market correction and high inflation that could prompt the US Federal Reserve to raise its benchmark interest rate faster than expected, causing financial conditions to tighten around the world and sideswipe economies with heavy debt loads, according to the report.

IMF chief economist Maurice Obstfeld was cited in the report as saying that there are several reasons to doubt the durability of the recovery, including advanced economies approaching the limits of their growth potential and the likelihood that expansions in the world’s two biggest economies— the U.S and China— will slow.

“The next recession may be closer than we think, and the ammunition with which to combat it is much more limited than a decade ago,” the report quoted him as saying.

World Bank also sounds a similar alarm

The World Bank earlier this month also warned on a short-term upswing.

The World Bank forecasts global economic growth to edge up to 3.1% in 2018 after a much stronger-than-expected 2017, as the recovery in investment, manufacturing, and trade continues, and as commodity-exporting developing economies benefit from firming commodity prices.

But growth might be short-lived because of years of softening productivity growth, weak investment, and the aging of the global labor force, the organization explained.

The deceleration is widespread, affecting economies that account for more than 65% of global GDP, said World Bank.

 

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