A tax overhaul in the U.S. could spill over to benefit the global economy.
The U.S. tax overhaul and higher expected federal spending points to faster growth just as the expansion enters its ninth year. This represents a of sea change from U.S. fiscal policy’s long drag on growth and bodes well for the synchronized, global expansion.
It's a small world after all...
Economies can run beyond potential for long stretches before peaking, especially when growth is just above trend, our research on economic cycles finds. Plus, some spare capacity persists globally, particularly in Europe. The global economy has never been so integrated at this point of an expansion, as we detail in Heating up, slowly, with world trade now making up about 50% of global GDP.
This lingering global slack should help moderate U.S. overheating and underpin the expansion, as U.S. stimulus spills abroad. The International Monetary Fund last week revised up its global growth forecast for 2018 in response to the U.S. tax overhaul. The plan features broad corporate tax cuts and allowances for companies to immediately expense capital spending. The incentive to raise capital spending could reinforce a business investment recovery that is underway. Stronger business investment should lift U.S. potential growth and lead to more U.S. imports. This is how the stimulus-growth boost could be shared beyond U.S. borders, and give the expansion more breadth and a longer lifespan. Deeply intertwined global trade and corporate supply chains mean demand is better redistributed around the world.
We believe the global expansion can push on, assuming U.S. overheating pressures are contained with global help. This creates a solid foundation for investors to put money to work in risk assets, as we highlight in our 2018 Global Investment Outlook.
