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US leading soft landing for global economy

MoneyFit 365By MoneyFit 365February 2, 2024No Comments
Us Leading Soft Landing For Global Economy

The world begins 2024 on an upbeat economic note, as inflation eases globally and growth remains more resilient than many forecasters expected. However, one country stands out for its surprising power: the United States.

After a world-shaking price spike in 2021 and 2022 – fueled by supply chain disruptions linked to the pandemic and then oil and food price spikes linked to Russia’s invasion of Ukraine – many nations are now watching inflation recede. And that’s without the painful recessions that many economists expected as central banks raised interest rates to get inflation under control.

But the details vary from place to place. Forecasters from the Federal Reserve to the International Monetary Fund have been more surprised by the remarkable strength of the United States economy, while growth in places like the United Kingdom and Germany remains weaker. The question is why America has pulled ahead of other developed economies in the pack.

The IMF said this week that it expects the United States to grow by 2.1 percent, a sharp upgrade from its previous estimate of 1.5 percent. Other major advanced economies are also expected to grow, albeit less rapidly. The euro area is expected to grow by 0.9%, as does Japan, and the UK is forecast to grow by 0.6%.

“This is a good situation, let’s be honest, this is a good economy,” Jerome H. Powell, the chairman of the Federal Reserve Bank, said at a news conference this week – two of the nearly 20 times he has called the data ” well” during his remarks.

Evidence of that strength continued Friday, when a blockbuster jobs report showed employers had added 353,000 jobs in January and wages rose at a brisk pace.

America’s outperformance came from a combination of luck and crisis, economists said. Here’s a summary of some of the factors behind the comparatively strong performance — starting with those that reflect policy choices and moving on to factors that are more due to chance.

One reason for US resilience: fiscal policy.

Part of the reason economic growth has been so surprisingly strong in the United States is simple: The American government has continued to spend a lot of money.

Government spending as a share of total output hovered around 35% in America in the years leading up to the pandemic, according to IMF data. But in 2020 and 2021, they jumped more than 40% as the government responded to the coronavirus with about $5 trillion in relief and incentives to people, businesses, institutions and state and local governments.

Both states and households slowly spent the savings they built up during those pandemic years, so the money continued to flow into the economy like a slow-release stimulant. In addition, government spending has remained elevated as the Biden administration has begun sweeping infrastructure and climate investments.

“As the economy recovered, the US added more fuel to the fire,” said Kristin Forbes, an economist at the MIT Sloan School of Management and a former Bank of England official.

Ms. Forbes noted that America’s deficit as a share of its gross domestic product is larger than that of many other advanced economies, and today’s spending adds to America’s debt pile. Given that, strong growth today could come at a cost — including higher interest bills — down the road.

Administration officials have suggested it was worth the compromise.

Lael Brainard, who heads President Biden’s National Economic Council, told reporters last week that the combined spending allowed families to “get through this really disruptive time and bounce back.”

However, government spending does not fully explain the divergence between the United States and other economies. Other countries also spent heavily to deal with the pandemic, and places like the eurozone and the UK are still spending more than before the pandemic in recent years as a share of output.

Jan Hatzius, chief economist at Goldman Sachs, said he believed the gross domestic product figures – which can be volatile and revised – could overstate the gap between US growth and that of other countries. But to the extent there is a gap, he doesn’t think government spending has been the key driver of the US’s stronger performance over the past year.

Instead, some economists said what’s happening could be due in part to differences in policy design — and to luck.

Pandemic layoff responses were not created equal.

America took a different approach than its European counterparts in how it designed political relief for workers displaced by the pandemic: It paid workers to stay home, with lump sum checks and expanded unemployment insurance, while countries in Europe they paid workers to stay on the job.

The resulting upheaval as Americans are sorted into new and better jobs could lead to the stronger productivity growth the United States is now seeing, said Adam Posen, president of the Peterson Institute for International Economics, a think tank in Washington, D.C. .

In advance, “it wasn’t clear what the best way would be,” Mr. Posen said, noting that many economists were concerned that the U.S. approach would actually perform slightly worse. “As always, it’s better to be lucky than to be good.”

Proximity to geopolitical problems is also important.

Other advanced economies have also fallen victim to the misfortune. European countries have been much more exposed to the aftershocks from Russia’s invasion of Ukraine in 2022, a conflict that has pushed up gas and grocery prices – upsetting the business environment and limiting households’ ability to buy other discretionary goods.

While the United States imported relatively little oil and natural gas from Russia, this was not the case for Europe. According to a survey by the European Investment Bank in 2023, 68 percent of European Union businesses had seen energy prices rise by 25 percent or more, compared to 30 percent of U.S. businesses that saw the same increase .

Speaking at the US Chamber of Commerce on Tuesday morning, Valdis Dombrovskis, the European trade commissioner, said Europe was working to address its dependence on Russian fossil fuels, but that cutting those ties “comes at a cost.” .

Kristalina Georgieva, managing director of the IMF, told reporters Thursday that the resilience of the U.S. economy stemmed from several factors — including insulation from volatility in global energy markets.

“There have been good economic forces and winds blowing in the US sails,” Ms Georgieva said.

Now, tensions in the Red Sea disrupting shipping routes there could have larger spillovers for Europe. The holiday began to drive up shipping prices and delay deliveries, particularly for goods traveling to Europe from Asia.

Officials in the Biden administration are watching these disruptions, but are less concerned because they are “a little less important to American supply chains than to other parts of the world,” Ms. Brainard said.

Demographics play a role.

When it comes to the absolute level of growth in the United States versus advanced economies like the Eurozone and Japan, America also has the advantage of a younger population. The median age in the United States is about 38.5, while it is 46.7 in Germany and 49.5 in Japan.

Youth helps make an economy more dynamic: Younger adults are working longer, and families having children, buying homes and building lives are spending more than retirees.

All this may matter for politics.

Whatever is causing the divergence could matter for economic policy.

The Fed, European Central Bank and Bank of England are all pushing to cut interest rates as they try to avoid undermining growth. Central bankers don’t want to cut interest rates too early and fail to fully curb inflation. They also want to avoid holding them too high for too long, causing more pain than is necessary to fight price increases under control.

For the ECB and the Bank of England, slower growth could make it a particularly delicate process – policy mistakes could flip these economies from slight growth to slight contraction. But completing the soft landing is a looming challenge for many central banks.

“At this point in the cycle, there is a risk of a premature easing, but there is also a risk of keeping interest rates higher for longer,” Ms Georgieva said. “Now they have to land the plane smoothly.”

Economy global landing leading soft
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