The International Monetary Fund on Monday raised its forecast for the U.S. economy over the next two years, saying President-elect Donald Trump's policies should boost economic growth, particularly in 2018. But officials warned that if Trump's protectionist trade proposals set off a trade war, that could be "quite destructive" for the global economy.
The IMF also increased 2017 growth projections for a number of other countries, including China, Germany, Japan and Britain, but warned that the global economy faced a number of downside risks from rising protectionism to a jump in interest rates.
The 189-nation global lending agency's latest economic outlook took note of the significant impact Trump's election has already had in giving a boost to U.S. stock prices, interest rates and the dollar. The new outlook puts U.S. economic growth at 2.3 percent this year and 2.5 percent in 2018. That would be an improvement from lackluster U.S. growth around 1.6 percent in 2016.
During the campaign, Trump said his economic policies of tax cuts, regulatory reform and boosts in infrastructure spending would lift U.S. growth to annual rates of 4 percent.
The new forecast represents a boost of 0.1 percentage point this year and an increase of 0.4 percentage point for 2018, when Trump's stimulus plans would be expected to be phased in. That is a half-point higher growth than the IMF was forecasting in October, before Trump's election.
In contrast, the World Bank last week left its U.S. forecast unchanged at 2.2 percent growth in 2017 and 2.1 percent for 2018, arguing that there was too much uncertainty over the fate of Trump's proposals to incorporate them in a forecast.
But IMF Chief Economist Maurice Obstfeld told reporters at a briefing Monday that he viewed the IMF's upgrade for the United States as a moderate increase that took into account the U.S. election results.
"We now have the presidency and the legislative branch in the same hands. It seems very clear to us that some of the promises will be delivered on," Obstfeld said. "We know the direction of policies. We don't know the specifics."
He said that the IMF had chosen not to incorporate Trump's threats of imposing higher tariffs on countries such as China and Mexico if their trade policies do not change because of a belief "that at the end of the day, countries will realize these are not in their best interests given the threat of retaliation. ... The outbreak of a trade war would be quite destructive."
For the overall global economy, the IMF left its projections unchanged growth of 3.4 percent for this year and 3.6 percent for 2018, both up from 3.1 percent growth in 2016, a year when global growth slowed to its weakest performance since the 2008-2009 financial crisis.
But the IMF saw better prospects in a number of countries including Germany, Japan, Spain and Britain, thanks in part to a rebound in growth in many parts of the world in the second half of last year that provided momentum going into 2017.
"The global economic landscape started to shift in the second half of 2016," Obstfeld said, helped by a rebound in manufacturing activity in many countries and the financial market rally that started with Trump's November election victory.
But Obstfeld said there was a wider than usual range of upside and downside risks in part because of the uncertainty over how much of Trump's program will win congressional approval and what the spillover effects will be for the rest of the world.
While Trump's election victory boosted economic prospects in the United States, the impact has been uneven for the rest of the world. Some countries could see stronger growth from the increase in activity in the United States, the world's largest economy, but some emerging market countries may face challenges as global interest rates rise.
The new outlook boosted the growth forecast for China, the world's second largest economy, by 0.3 percentage point to 6.5 percent this year. The IMF expects the Chinese government to providing further stimulus to the economy.
The outlook also boosted 2017 growth projections for Germany, Japan, Spain and Britain to reflect stronger-than-expected performances in the second half of last year. At the same time, the IMF lowered its forecasts for Italy, South Korea, India and Brazil, reflecting disappointing performances in the last half of 2016.
The IMF said that growth prospects in Latin America were being hurt by rising uncertainty about the outlook in Mexico, given Trump's statements overhauling trade relations between the United States and Mexico. about The IMF slashed its growth projections for Mexico by 0.6 percentage point in both 2017 and 2018 to 1.7 percent this year and 2 percent next year.
Obstfeld said that among the risks facing the global economy at the moment were "higher popular antipathy toward trade, immigration and multilateral engagement" among voters in the U.S. and Europe.