The International Monetary Fund on Monday said the U.S. economy would grow faster than previously expected in 2017 and 2018 based on the incoming Trump administration’s tax and spending plans, but it kept its global growth forecasts unchanged due to weakness in some emerging markets.
Updating its World Economic Outlook, the IMF forecast overall global growth at 3.4 percent for 2017 and 3.6 percent for 2018, unchanged from October. That compared to 3.1 percent in 2016, the weakest year since the 2007-2009 financial crisis.
It estimated a modest fiscal stimulus under President-elect Donald Trump would push U.S. gross domestic product growth to 2.3 percent in 2017, a gain of 0.1 percentage point on the last forecast, and to 2.5 percent in 2018, up 0.4 percentage point.
The IMF noted, however, that Trump’s plans for expansionary fiscal measures including tax cuts and infrastructure spending also could stoke inflation in an economy already nearing full employment.
“If a fiscally-driven demand increase collides with more rigid capacity constraints, a steeper path for interest rates will be necessary to contain inflation, the dollar will appreciate sharply, real growth will be lower, budget pressure will increase, and the U.S. current account deficit will widen,” IMF chief economist Maurice Obstfeld said in a statement.
That would increase the likelihood of more protectionist U.S. trade measures and retaliatory responses, Obstfeld told a news conference.
“In that scenario, all countries would lose out,” he added.
But the new IMF outlook does not include any assumptions regarding Trump’s trade plans, such as potential tariffs on Mexican and Chinese goods, as there seems to be less of a political consensus surrounding them, Obstfeld said.
The IMF does assume a stronger dollar, firmer oil prices and “more inflationary pressure and a less-gradual normalization of U.S. monetary policy.”
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While stronger oil and commodity prices have improved the picture for oil exporters including Nigeria, higher interest rates and tighter financial conditions will negatively affect many emerging market economies, including Mexico and Brazil.