The International Monetary Fund warned policymakers to be on guard for the next recession even as it predicted global growth will accelerate to the fastest pace in seven years as U.S. tax cuts spur businesses to invest.
The fund raised its forecast for world expansion to 3.9 percent this year and next, up 0.2 percentage point 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.
The strengthening recovery offers a “perfect opportunity now for world leaders to repair their roof,” IMF Managing Director Christine Lagarde told reporters Monday in Davos, Switzerland where the World Economic Forum is meeting. “Growth in our view needs to be more inclusive.”
About half of the IMF’s global upgrade stems from the Republican tax cuts passed in December and enacted this year. Cuts to the corporate tax rate will give the world’s biggest economy a shot in the arm, lifting U.S. growth to 2.7 percent this year, 0.4 point higher than the fund expected in October, the IMF said Monday in an update to its World Economic Outlook. Projected U.S. growth was the highest among advanced economies.
But in an unfortunate twist for President Donald Trump, who loathes the $505-billion U.S. trade gap, the nation’s current-account deficit will widen as stronger demand drives imports. The IMF also predicted that the tax plan will reduce U.S. growth after 2022, offsetting earlier gains, as some of the individual cuts expire and the U.S. tries to curb its budget deficit.
The IMF also warned that a financial-market correction could spoil the party — a possible scenario it raises amid “rich asset valuations and very compressed term premiums.” Higher inflation could prompt the U.S. Federal Reserve to raise its benchmark interest rate faster than expected, causing financial conditions to tighten around the world and sideswiping economies with heavy debt loads, said the Washington-based fund.
The current upturn is unlikely to become a “new normal” IMF chief economist Maurice Obstfeld told reporters at the Davos briefing.
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, Obstfeld said.
“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,” he said.
The IMF’s sunnier outlook will be cause for relief as the world’s financial and political elite converge on Davos, Switzerland, this week for the annual meeting of the World Economic Forum. Just past the first anniversary of his administration, Trump is scheduled to speak on Jan. 26 to deliver an “America First” message touting his economic agenda. A government shutdown in Washington could scuttle the president’s plans for Davos, though.
Some of the discussion in Davos will be focused on protecting against complacency.
“With the world economy now being the most integrated it has been in its history, it’s not surprising that people are starting to worry about the pendulum swinging in the other direction,” said Philipp Hildebrand, vice chairman at investment firm BlackRock Inc.
In addition to overheating in financial markets, the IMF flagged protectionism, geopolitical tensions and extreme weather as risks to the global economy.
“This year could be one for the optimists and the pessimists,” said Dominic Barton, global managing partner of consulting company McKinsey & Co. “The mood is pretty good from a business point of view because of the synchronous growth.”
The IMF says the global recovery now under way is the broadest in seven years, with growth picking up last year in 120 countries accounting for three-quarters of world output.
The fund lifted its outlook for the euro zone to 2.2 percent growth in 2018, up 0.3 point from October. Japan will grow 1.2 percent in 2018, up 0.5 point, the IMF said.
China will expand at a 6.6 percent pace this year, up 0.1 point from October, according to the IMF. The fund left its 2018 forecast for India unchanged from three months ago, at 7.4 percent. As the U.K. works through Brexit, its growth was forecast at 1.5 percent in 2018 and again in 2019.
Policy makers should take steps to raise potential growth, such as with reforms that lift productivity, the IMF said. It’s imperative for countries to boost resilience to financial shocks, such as through “proactive” financial regulation, said the fund, which was conceived during the Second World War to oversee the world currency system and has evolved into a lender of last resort to indebted nations.