World Bank: Trump Tax Cuts Could Jump-Start Global Economy

by Bloomberg News
(United States)

President-elect Donald Trump’s tax cuts and spending plans could deliver a shot in the arm to the U.S. economy, lifting growth around the world, although uncertainty about his trade policies adds to the risks, according to the World Bank.

The Trump administration could squander the economic gains of fiscal stimulus if it imposes new trade barriers that provoke retaliation by other countries, the Washington-based development lender said Tuesday in the latest update to its global economic outlook.

Overall, it’s too early to assess what the net impact will be of Trump’s economic policies, the World Bank said. Accordingly, it left its forecast for U.S. growth this year and next unchanged, at 2.2 percent and 2.1 percent, respectively. The outlook doesn’t incorporate the expected effect of Trump’s policy proposals, according to the report.

The bank projects the world economy will grow 2.7 percent in 2017, down 0.1 percentage point from its forecast in June. Stalling trade, weak investment and heightened policy uncertainty have dampened global economic activity, pushing growth down to an estimated 2.3 percent last year -- the slowest rate since the financial crisis.

The World Bank estimates global growth will pick up to 2.9 percent next year, also down 0.1 percent from its June call.

Brexit Uncertainty

The development lender sees the euro zone expanding at a 1.5 percent rate this year with uncertainty lingering as the U.K. starts negotiations to withdraw from the European Union, which will weigh on growth this year and next. Japan is seen growing 0.9 percent this year, while China’s output is set to expand 6.5 percent, the World Bank said.

U.S. growth could accelerate to as much as 2.5 percent this year and 2.9 percent in 2018 if the Trump administration follows through on a pledge to cut the corporate income-tax rate from 35 percent to 15 percent, and slash individual rates, the World Bank estimates.

“When you have this combination of tax cuts, you have a positive outcome on investment and personal consumption,” Ayhan Kose, director of the bank’s Development Prospects Group, said in an interview.

A U.S. pickup on that scale would boost global growth by 0.1 percentage point in 2017 and at least 0.3 point next year, depending on the timing of the tax cuts and the response of the Federal Reserve, according to the development lender.

The World Bank said Trump’s plan to boost infrastructure spending could also lift growth, but it cautioned that the benefits could be offset if overall federal spending falls.

Trading Partner

The U.S. is the biggest trading partner for about a quarter of the world’s nations. As a result, efforts by the U.S. to renegotiate trade deals and impose new barriers could set back the global economy, the World Bank said. Trump, who will take office on Jan. 20, focused on trade during his campaign for the president, saying he’ll rethink trade relations with China, renegotiate or withdraw from the North American Free Trade Agreement and keep the U.S. out of the Trans-Pacific Partnership agreement.

“Whenever a country imposes a trade restriction, on the other side of the table the country might impose policies as well, and that could escalate the conflict,” Kose said.

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