The U.S. economy is poised to gain steam this year, but that rosy forecast could change if President Trump’s promises of tax reform fail to materialize.
Ahead of a meeting of world finance chiefs in Washington this week, the International Monetary Fund released on Tuesday its flagship report on the world economy, forecasting the U.S. economy would grow at 2.3% this year and 2.5% in 2018 — a faster pace than last year’s 1.6%.
The uptick is driven by expectations that the U.S. will cut taxes and higher confidence among consumers and businesses. The IMF also forecast that all five of Europe’s largest economies will grow even faster. Projected global growth is set to rise to 3.5% from 3.1%.
Since Trump’s election in November, expectations of looser fiscal policy in the U.S. have contributed to a stronger dollar and higher U.S. Treasury interest rates.
Campaign promises by Trump to pursue policies that would lead to faster growth, such as dismantling the Dodd-Frank financial regulations, tax reform and repealing and replacing Obamacare, have helped to bolster investor expectations.
“The anticipated shift in the policy mix so far has buoyed financial markets and strengthened business confidence, which could further fuel the current momentum,” the IMF report said.
The IMF’s prediction, however, could be upended if the administration’s legislative efforts continue to face obstacles. Efforts by Republicans to push through a new health care bill collapsed last month, and GOP lawmakers could hit another wall if they’re unable to tap savings from a new health care bill in order to support a tax plan.
“If that doesn’t materialize as expected, we would have to revise,” said Maurice Obstfeld, the IMF’s chief economist during a press briefing, noting that “fiscal stimulus as of now is a work in progress” with “many components being debated.”
The IMF’s next set of economic projections is due in July.
There are already signs of an impending slowdown. Treasury Secretary Steven Mnuchin on Monday told the Financial Times the administration’s plan to roll out tax reform would likely slip as a result of the Republican-led healthcare overhaul bill.
Finalizing a tax plan that could be signed by President Donald Trump by August was “highly aggressive to not realistic at this point,” he said in his interview with the Financial Times. Mnuchin had previously promised to deliver a tax plan to the president by then.
Still, the former Goldman Sachs banker maintained that tax reform would be complete in 2017.
In recent weeks, The Trump administration has said it has re-prioritized efforts to pass a health care bill ahead of tackling tax policy. Trump said last week that one of the reasons is that he’s relying on savings from the health bill to support the tax plan.
Looking at the global economy, the IMF economists said it’s an open question whether signs of strength could be sustained given trade frictions, political uncertainty and China’s debt problems.
Among the factors that could harm economic growth: a protectionist trade agenda, a faster-than-expected rate hike in the U.S., and an aggressive rollback of financial regulations, according to the IMF’s report.