Economy Watch: IMF Ups Economic Growth Predictions

The IMF cited factors such as stronger-than-expected activity in 2017 and the macroeconomic impact of tax reform as reasons for its revised growth forecast.

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Source: International Monetary Fund DataMapper, 2018

The Internatonal Monetary Fund has revised its growth forecast for the United States economy in the coming years, citing on Monday stronger-than-expected activity in 2017, higher projected external demand, and the macroeconomic impact of the tax reform, in particular the reduction in corporate tax rates and the temporary allowance for full expensing of investment. The forecast also assumes that the decline in tax revenues will not be offset by spending cuts in the near term.

The IMF thus adjusted its U.S. growth forecast from 2.3 percent to 2.7 percent in 2018, and from 1.9 percent to 2.5 percent in 2019. Overall, the organization predicted, the tax policy changes will add to growth through 2020, so that U.S. real GDP will be 1.2 percent higher by that year than in a projection without the tax policy changes.

The tax changes are anticipated to stimulate near-term activity in the United States. As a by-product, stronger domestic demand is projected to increase imports and widen the current account deficit. In light of the increased federal deficit, however, and the temporary nature of some provisions, growth is expected to be lower than in previous forecasts for a few years from 2022 onward, offsetting some of the earlier gains.

The IMF forecast for higher U.S. economic growth comes in the context of higher predicted growth for most of the world. Global growth for 2017 is now estimated at 3.7 percent, 0.1 percent higher than projected in the fall. Upside growth surprises were particularly pronounced in Europe and Asia, but broad based, with both the advanced and developing economies exceeding the IMF fall forecasts by 0.1 percentage points.

The stronger momentum experienced in 2017 is expected to carry into 2018 and 2019, with global growth revised up to 3.9 percent for both years (0.2 percentage point higher relative to the fall forecasts), according to the IMF.