The IMF on Monday said the US economy would grow faster than previously expected this year and next, based on the tax and spending plan of the incoming administration of US president-elect Donald Trump.
However, 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 this year and 3.6 percent for next year, unchanged from its forecast in October last year.
That compared with an estimated 3.1 percent for last year, the weakest year since the 2007 to 2009 financial crisis.
It estimated a modest fiscal stimulus under Trump would push US GDP growth to 2.3 percent this year, a gain of 0.1 percentage point on the previous forecast, and to 2.5 percent next year, up 0.4 percentage points.
However, the IMF said that Trump’s plans for expansionary fiscal measures — including tax cuts and infrastructure spending — could also stoke inflation in an economy that is 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 [US] dollar will appreciate sharply, real growth will be lower, budget pressure will increase and the US current account deficit will widen,” IMF chief economist Maurice Obstfeld said in a statement.
That would increase the likelihood of more protectionist US trade measures and retaliatory responses, Obstfeld told a news conference.
“In that scenario, all countries would lose out,” he added.
However, 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 US dollar, firmer oil prices and “more inflationary pressure and a less-gradual normalization of US monetary policy.”
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.
The IMF cut Mexico’s growth forecasts by 0.6 percentage point for both this year and next year, citing a consumer spending pullback amid worries about Trump’s trade policies.
The IMF revised its growth forecast for China for this year to 6.5 percent, up 0.3 percentage points from October, based on expectations for continued stimulative government policies, but left unchanged its forecast for next year of slower growth of 6 percent.
The fund said China’s reliance on stimulus, rapid expansion of debt and slow progress in dealing with corporate debt “raises the risk of a sharper slowdown or disruptive adjustment.”
India, which has recorded some of the world’s strongest recent growth, is experiencing a shock to consumption from the government’s decision to withdraw larger currency notes from circulation, chopping a full percentage point off the IMF’s fiscal 2016-2017 growth outlook to 6.6 percent.
The fund trimmed its fiscal 2017-2018 forecast for India to 7.6 percent from 7.2 percent.
The IMF raised its forecasts for this year the eurozone and Japan by 0.1 percentage points each, largely because of stronger-than-expected results in the second half of last year. Britain’s forecast was increased 0.4 percentage points, but its growth for next year was reduced by 0.3 percentage points.
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