US economy leads global recovery amid 'aggressive' fiscal stimulus, IIF says

The US economy led a global recovery from the coronavirus-induced slowdown, with its “aggressive” fiscal stimulus helping it to rebound at a quicker pace than it did after the 2008 financial crisis, said the Institute of International Finance.

The world's largest economy made the most complete recovery, compared with other Group of 10 industrialised economies, with both consumption and investment in the third quarter of 2021 rising above their levels at the end of 2019, the IIF said in its Global Macro Views report.

“This remarkable accomplishment is due primarily to substantial fiscal stimulus, which dwarfs in size what was done after the Great Recession,” the IIF report authors said.

The report also surveyed the global recovery from pandemic-induced slowdown and assessed 21 advanced economies and 23 emerging markets.

The US economy last year grew at the fastest pace since Ronald Reagan's presidency in the 1980s, bouncing back with resilience from 2020's brief but devastating coronavirus-induced recession.

The country's gross domestic product expanded 5.7 per cent in 2021. It was the strongest calendar-year growth since a 7.2 per cent surge in 1984 after a previous recession.

The economy ended the year by growing at an unexpectedly brisk 6.9 per cent annual pace from October through to December as businesses replenished their stocks, the US Commerce Department reported on January 27.

The US economy is estimated to have expanded 5.6 per cent last year, according to the International Monetary Fund. It is forecast to expand 4 per cent in 2022, which is a 1.2 percentage point lower than the IMF’s October projection. The fund expects US growth to reach 2.6 per cent in 2023.

“The US staged a remarkable recovery from Covid, especially given that the pandemic is far from over,” the IIF said.

Real private consumption returned to its pre-Covid levels in the third quarter of last year, a “truly remarkable feat that was never accomplished in the wake of the 2008 crisis”, they said.

Fixed and residential investment in the US have similarly made “remarkable” recoveries.

“The US stands out vis-a-vis its G10 peers also in terms of gross fixed capital formation, where it is again the best performer,” the IIF said.

However, the global economic recovery from the pandemic is “highly uneven”, with an investment slump weighing on medium-term growth prospects outside the US, according to the IIF.

The euro zone appears to be headed for a major investment slump, on par with what is playing out in some emerging markets in Africa, South America and Asia, the IIF survey found.

“The euro zone seems to have entered a disinvestment cycle, comparable in severity to EMs like South Africa, Colombia, Malaysia and the Philippines,” the IIF said. “This disinvestment cycle runs the risk of transforming the Covid shock into a medium-term drag on growth.”

The euro zone is also on the “weaker end of the spectrum”, compared with other G10 nations, in terms of real private consumption and gross fixed capital formation, the survey found.

“It is true that the euro zone saw a more pronounced run-up in investment ahead of Covid, so perhaps part of the weaker picture now simply points to overinvestment before the pandemic,” the IIF said.

“We are not inclined to believe this explanation, however, and see mounting risk that the euro zone may be entering a prolonged investment slump, which could extrapolate the Covid shock to weaker medium-term growth,” they said.

Advanced economies, which are estimated to have grown 5 per cent in 2021, are now set to grow 3.9 per cent this year, 0.6 per cent lower than estimated in October, the IMF said in its latest World Economic Outlook report in January.

The growth is expected to moderate further to 2.6 per cent, which is still a 0.4 per cent improvement from the previous forecast.