The International Monetary Fund (IMF) has upgraded its global growth forecast by 0.2%to 3.9% for 2018 and 2019 due to increased global growth momentum, and the expected impact of the US tax reform law.

The IMF said it expects US tax policy changes to stimulate activity, with the short-term impact driven by the investment response to the corporate income tax cuts. It said the effect on US growth is estimated to be positive over the next couple of years, cumulating to 1.2% through 2020.

“The effects of the package on output in the United States and its trading partners contribute about half of the cumulative revision to global growth over 2018–19,” said the IMF.  However, “due to the temporary nature of some of the tax law’s provisions, the tax policy package is projected to lower growth for a few years from 2022 onwards.”

For the two-year forecast horizon, the IMF said the upward revisions to the global outlook come mainly from advanced economies, where growth is now expected to exceed 2% in 2018 and 2019.

“This forecast reflects the expectation that favorable global financial conditions and strong sentiment will help maintain the recent acceleration in demand,” said the report, “especially in investment, with a noticeable impact on growth in economies with large exports.”

The IMF said global economic output is estimated to have grown by 3.7% in 2017, which is 0.1% faster than projected in the fall, and 0.5% higher than in 2016. It said the pickup in growth has been broad-based, with upside surprises in Europe and Asia.

“Some 120 economies, accounting for three quarters of world GDP, have seen a pickup in growth in year-on-year terms in 2017, the broadest synchronized global growth upsurge since 2010,” said the report.

Growth in the third quarter of 2017 was higher than projected in advanced economies, particularly in Germany, Japan, Korea, and the US. Meanwhile, emerging market and developing economies, such as Brazil, China, and South Africa, also posted third-quarter growth stronger than forecasts.

The IMF also said that the current cyclical upswing provides an ideal opportunity for reforms.  It said shared priorities among all economies include implementing structural reforms to boost potential output and making growth more inclusive.

“In an environment of financial market optimism, ensuring financial resilience is imperative,” said the report. “Weak inflation suggests that slack remains in many advanced economies and monetary policy should continue to remain accommodative.”

However, the IMF added that “improved growth momentum means that fiscal policy should increasingly be designed with an eye on medium-term goals—ensuring fiscal sustainability and bolstering potential output. Multilateral cooperation remains vital for securing the global recovery.”

Risks to the global growth forecast appear broadly balanced in the near term, but remain skewed to the downside over the medium term, said the IMF.

“The cyclical rebound could prove stronger in the near term as the pickup in activity and easier financial conditions reinforce each other,” said the report. “On the downside, rich asset valuations and very compressed term premiums raise the possibility of a financial market correction, which could dampen growth and confidence.”

The IMF said a possible trigger for a correction is a faster-than-expected increase in advanced economy core inflation and interest rates.

“If global sentiment remains strong and inflation muted, then financial conditions could remain loose into the medium term, leading to a buildup of financial vulnerabilities in advanced and emerging market economies alike,” said the IMF. “Inward-looking policies, geopolitical tensions, and political uncertainty in some countries also pose downside risks.”

Tags: Global Growth 2018, IMF Global Growth Forecast, International Monetary Fund (IMF), US Tax Policy