Despite uncertain conditions shadowing the world economy, the International Monetary Fund (IMF) retained its global growth forecast of 3.4 percent for 2017 as against 3.1 percent for 2016. At the same time, the IMF bumped up the forecast for the US and China, but cut its estimates for India.
For the US, the IMF said output could grow to 2.3 percent in 2017, a gain of 0.1 percentage point on the last forecast, and to 2.5 percent in 2018, up 0.4 percentage point, as president-elect Donald Trump plans to cut taxes and boost infrastructure spending over this year and next.
After his victory in November 2016, Trump promised to lower personal and corporate income taxes and increase infrastructure spending. If he acts on what he promised and unveils fiscal stimulus in the form of tax cuts and spending hikes, this may inflate the government debt and fan inflation. And that would be enough for the US Federal Reserve to raise interest rates aggressively in 2017 and thus rattle the world markets.
However, the fund flagged concerns over uncertainty surrounding the policy stance of the new US administration under Trump, who is set to assume office at the White House on January 20, and its global ramifications.
"We see a wider dispersion of risks to this short-term forecast, with those risks still tilted to the downside," Maurice Obstfeld, IMF's chief economist, said in IMF's latest World Economic Outlook.
The IMF economists are concerned that Trump's policies towards certain economies could spark a trade war as countries would escalate tariffs in a tit-for-tat move, especially against China and Mexico.
"This last scenario, one with a widening of global imbalances, intensifies the risk of protectionist measures and retaliatory responses," Obstfeld said.
In its outlook, the fund downgraded India's growth outlook by a full percentage point to 6.6 percent for fiscal 2016-17, citing the blow to the cash-reliant economy after demonetisation.
However, for fiscal 2017-18, India is forecast to grow at 7.2 percent, down from earlier projections of 7.6 percent.
The IMF pushed up its China growth outlook for 2017 by 0.3 percentage points to 6.5 percent on expectations of the government's continued policy stimulus. However, it warned that reliance on policy stimulus raises the risk of a sharper slowdown in the coming years.