Trump’s economic plans carry risks, but ‘could lift world economy’

Published: 4:00 AM, January 12, 2017

WASHINGTON — President-elect Donald Trump’s tax cuts and spending plans could deliver a shot in the arm to the United States’ 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 on Tuesday in the latest update to its global economic outlook.

Overall, it is too early to assess what the net impact of Mr Trump’s economic policies will be, the World Bank said.

Accordingly, it left its forecast for US growth this year and the next unchanged, at 2.2 per cent and 2.1 per cent respectively. The outlook does not incorporate the expected effect of Mr Trump’s policy proposals, according to the report.

The bank projects the world economy will grow 2.7 per cent 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 per cent last year — the slowest rate since the financial crisis.

For 2018, global growth will pick up to 2.9 per cent, the World Bank estimated, also down 0.1 per cent from its June call.

The World Bank sees the euro zone expanding at a 1.5 per cent rate this year, with uncertainty lingering as the UK starts negotiations to withdraw from the European Union. Japan is seen growing 0.9 per cent this year, while China’s output is set to expand 6.5 per cent, the World Bank said.

US growth could accelerate to as much as 2.5 per cent this year and 2.9 per cent in 2018 if the Trump administration follows through on a pledge to cut the corporate income-tax rate from 35 per cent to 15 per cent 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,” Mr Ayhan Kose, director of the bank’s Development Prospects Group, said in an interview.

A US 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 Mr 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.

The US is the biggest trading partner for about a quarter of the world’s nations. As a result, efforts by the US to renegotiate trade deals and impose new barriers could set back the global economy, the World Bank said.

Mr Trump, who will take office on Jan 20, focused on trade during his campaign for the president, saying he will rethink trade relations with China, renegotiate or withdraw from the North American Free Trade Agreement and keep the US 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,” Mr Kose said. BLOOMBERG