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Global organization the International Monetary Fund (IMF) is now expecting worldwide economic growth to pick up the pace over the next few years through the impact of the recently enacted US tax reforms.

With the passage of US President Donald Trump’s tax cuts, IMF has revised overall global economic output for 2018 and 2019, believing that the tax law will help increase investment and its major trading partners.

IMF now foresees a 3.9 percent expansion for both years, raising 0.2 percent from its last estimate in October. This would mark as the strongest year for the world economy since 2011.

IMF also noted that global economic activity continues to build up and is estimated to have expanded by 3.7 percent in 2017, which was 0.1 faster than expected in the fall and ½ percent more than in 2016.

Senate Republicans’ extensive $1.5 trillion tax package received approval in December 2017, marking Trump’s biggest legislative win in his first year. The largest overhaul since the 1980s then lowered corporate tax from 35 percent to 21 percent.

IMF Sees Higher US Economic Growth

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The US economy is now expected to grow to 2.7 percent this year, but was also likely to slow to 2.5 percent in 2019. In IMF’s previous estimate, the country’s economy was to expand 2.3 percent in 2018 and 1.9 percent next year.

The world’s largest economy has shown steady but average annual growth since the last fall in 2007 to 2009.    

Growth of the country’s economy is also projected to be optimistic through 2020, generating 1.2 percent throughout that year.   

IMF stated that the impact of the tax law on the US and its trading partners is expected to account for about half of the upward changes to global economic growth over the next two years.

A stronger US economy is also likely to improve economies of its trading partners, particularly Mexico and Canada.

As a result of the tax law, IMF expects Mexico’s economy to climb 0.4 percent in 2018 and 0.7 percent next year, while Canada will grow 0.2 percent and 0.3 percent.

US Economic Growth to Weaken in 2022

Even though the boost in US growth is likely to be significant, IMF cautioned that US economic growth will start to fade from 2022 onwards, as short-term spending activities created by the tax changes began to expire.

IMF chief economist Maurice Obstfeld stated that the tax reforms would expand US current account deficit, build up the dollar, and influence investment flows around the globe.

The tax package is only estimated to accelerate expansion in 2018 and 2019. The boost is then expected to weaken as budget deficit grows and the government will have to decide on whether to lower spending or add more revenue.       

Accelerated development could still be prolonged if these tax cuts are extended or made permanent.

Obstfeld also said that the current economic momentum shows a junction of factors that is unlikely to last for long, adding that governments must take measures to address interferences to growth, so as to make it broader and make economies stronger when the next recession comes.

Moreover, Obstfeld warned that the next downturn might be closer than anticipated and that it may be more difficult to handle than the past decade, seeing the size of public sector debt.

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