(MENAFN- The Peninsula) The Peninsula
As boost from the US tax reform is likely to offset by other factors, the growth in 2018 is expected to remain at 2.5 percent.
'Last week, the US congress passed an ambitious tax reform programme. The reforms, which consist primarily of a large corporate tax cut, should provide a significant boost to growth in 2018, although this will be offset as the recent drivers of strong growth begin to fade, QNB noted in its weekly ‘economic commentary', yesterday.
In 2017, growth picked up to around 2.5 percent as a result of relatively accommodative monetary policy, a weak US dollar, strong growth in private consumption and a rebound in mining investment. In 2018, all these factors are likely to provide less support to the economy. As a result, QNB expects growth in 2018 to remain at 2.5 percent as the boost from tax reform is offset by the other factors.
The US tax reforms will be mainly come into effect on January 1, 2018, a year earlier than initially expected. The signature provision is a corporate tax rate cut from 35 percent to 21 percent.
Other notable provisions include a number of deductions from corporate taxable income and a cut in the highest marginal income tax rate for individuals from 39.6 percent to 37 percent. As a result, tax reform is now expected to provide a boost to real GDP growth in 2018 of around 0.3 percentage points.
However, this boost is likely to be offset by four main factors that will provide less support to the US economy in 2018 than they did in 2017.
First, Fed monetary policy is likely to be less accommodative in 2018 than it was in 2017. The Fed expects to reduce its balance sheet by $400bn in 2018 and has left expectations for its policy rate unchanged after its December meeting at three hikes in 2018.
This came despite the upward revisions to growth, which also prompted lower projections for the 2018 unemployment rate of 3.9 percent, unemployment has only fallen below this level for one month in the last 48 years.
The Fed may be holding back on projecting more rate hikes because inflation has been lower than expected during 2017.
However, the Fed's preferred measure of core inflation has started picking up in the last couple of months and, with tightening labour markets and rising oil prices, higher inflation in 2018 could make Fed policy tighter than expected.
Second, in 2018, the dollar is unlikely to weaken as much as it did in 2017. A weaker US dollar in 2017 led to strong gains in net exports. With the Fed expecting to continue tightening policy and the risks tilted towards more hikes rather than fewer, the dollar looks unlikely to weaken further and more likely to strengthen, if anything. This could be a dampener for growth in 2018.
Third, personal consumption growth, the largest contributor to GDP, is likely to slow in 2018. Private consumption growth was high during the second half of 2016 and early 2017, averaging around 3 percent, helped by lower than expected inflation, low oil prices and an improving jobs market. However, in 2018, this rate of consumption growth is probably unsustainable as inflation ticks up, oil prices rise and as employment growth slows.
Finally, a rebound in mining investment helped drive growth in early 2017, but this effect is now fading. Investment in oil production collapsed in 2016 as oil prices fell, but bounced back in 2017 as oil prices recovered. The same gains in investment are, therefore, unlikely to be repeated in 2018, given a more moderate expected rise in oil prices.
The upshot is that the fading drivers of US growth are likely to keep 2018 growth broadly in line with 2017, despite the largest US tax reform in over 30 years. Nonetheless, a 2.5 percent growth rate in the US is well above trend and should be broadly positive for the global economy in 2018.
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