The International Monetary Fund on Monday said the global economy is expected to grow by 3.9 percent in both 2018 and 2019, a 0.2 percentage point higher than its fall forecasts.
The revision reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes, the IMF said in its World Economic Outlook (WEO) report, published ahead of the World Economic Forum in Davos, Switzerland.
"As the year 2018 begins, the world economy is gathering speed," Maurice Obstfeld, IMF Economic Counsellor and Director of Research told a press conference on Update of the World Economic Outlook in Davos, which was broadcast live.
The IMF forecast growth of China's economy is expected to moderate gradually, though with a slight upward revision to the forecast for 2018 and 2019 relative to the fall forecasts, reflecting stronger external demand.
It predicted China's grow at 6.6 percent this year and 6.4 percent for the next year, both 0.1 percentage point higher than its October forecasts.
Last October, the IMF forecast China's economy to notch up to 6.8 percent in 2017, and to slow to 6.5 percent in 2018. It turned out that China's economy totaled 82.7 trillion yuan (about $13 trillion) in volume in 2017, expanding 6.9 percent as it picked up pace for the first time in seven years.
Obstfeld said the two biggest national economies driving current and near-term future growth are predictably headed for slower growth.
China will both cut back the fiscal stimulus of the last couple of years and rein in credit growth to strengthen its overextended financial system, Obstfeld said.
"Consistent with these plans, the country's ongoing and necessary rebalancing process implies lower future growth," he said.
As for the U.S., whatever impact its tax cut will have on an economy so close to full employment will be paid back partially later in the form of lower growth, as temporary spending incentives (notably for investment) expire and as increasing federal debt takes a toll over time.
Commenting on the forecast being 0.2 percentage point higher than IMF's current estimate of last year's global growth, he said, "This is good news. But political leaders and policymakers must stay mindful that the present economic momentum reflects a confluence of factors that is unlikely to last for long."
According to the new update, global growth for 2017 is now estimated at 3.7 percent, 0.1 percentage point higher than projected in the fall.
Strong growth surprises were particularly pronounced in Europe and Asia but broad based, with outturns for both the advanced and the emerging market and developing economy groups exceeding the fall forecasts by 0.1 percentage point, the new WEO said.
The new WEO said the effect of U.S. tax policy changes on U.S. growth is estimated to be positive through 2020, cumulating to 1.2 percent through that year, with a range of uncertainty around this central scenario. Due to the temporary nature of some of its provisions, the tax policy package is projected to lower growth for a few years from 2022 onwards.
It said that risks to the outlook remain skewed to the downside over the medium term. One notable threat to growth is a tightening of global financing terms from their current easy settings, either in the near term or later.
"The global financial crisis may seem firmly behind us, but without prompt action to address structural growth impediments, enhance the inclusiveness of growth, and build policy buffers and resilience, the next downturn will come sooner and be harder to fight," Obstfeld said.
