Fiscal relief and stimulus measures will lead to strong economic growth in 2021. The U.S. economy started this year with momentum. In addition to the fiscal stimulus measures, the U.S. vaccination program has evolved very well and is likely to have increased confidence that the pandemic will gradually subside in the current year. The very expansionary fiscal policy and the gradual easing of the containment measures will massively stimulate private consumption this year. In addition, many households accumulated savings last year which will be partly used for private consumption this year. I am optimistic for the U.S. economy and expect a GDP growth rate of around eight percent this year (the consensus is somewhat lower at around 7 percent). Inflation will increase this year to almost four percent, but will decrease again in 2022 to around two percent. In the medium-term, I expect somewhat higher inflation rates than in the pre-pandemic period of time.
In the United States, economic output rose by 1.6 percent in the first quarter of the current year (annualized 6.4 percent). The recovery continued after the pandemic-related slump in the first half of 2020 was thus stronger again after weaker growth in the final quarter of 2020. New corona infections, which had already been rising since the fall, peaked in mid-January. Infection control measures were somewhat stricter than in late summer and continued to weigh on personal services in particular.
The US economy started the second quarter with even more momentum. Industrial production and retail sales continued to rise. Purchasing managers’ indices continued their upward trend above the expansion threshold of 50 index points, and consumer sentiment also brightened. These developments were mainly due to the aid and stimulus packages adopted at the end of December and in mid-March totaling more than two and a half trillion US dollars. This sum includes, among other things, one-time payments to low- and middle-income persons of $2,000 and an increase in unemployment benefits of $300 a week until September (however, some states opted out of this program in recent weeks). In addition, the vaccination program has evolved very well by international standards and has contributed to a gradual waning of the pandemic. The various containment measures are gradually being relaxed and have even been lifted to a large extent in some states.
The very expansionary fiscal policy and the gradual easing of containment measures are massively stimulating private consumption in the current year. In addition, households have massively expanded their savings rate on average since the outbreak of the pandemic. This year and next, the savings rate should gradually return to normal and further stimulate private consumption. These factors should lead to extremely strong economic growth in the summer half-year, driven primarily by private consumption. In the wake of this development, the situation on the labor market will also improve significantly. In May, the unemployment rate was only 5,8 percent down from 14.7 percent in April 2020. However, the official unemployment rate continues to underestimate the actual extent of unemployment by probably more two percentage points.
Against a background of strong consumer demand, business investment will also continue to increase markedly. Although corporate financing conditions are less favorable than last year, they continue to support the propensity of companies to invest.
Monetary policy will remain expansionary – partly because the central bank’s revised monetary policy strategy will allow a moderate overshooting of the inflation rate above the average inflation target of two percent. In the current year, the inflation rate is likely to rise to over three percent in some months; however, this is also due to temporary factors such as higher oil prices compared with last spring. Currently, I am less worried about short-term inflation than some other commentators. But one should certainly not deny that inflation risks have increased and one should not take for granted that inflation rates will rapidly slow down to around two percent again. One should also stress that the Federal Reserve bases its decisions mainly on the Personal Consumption Expenditures Price Index (published by the Bureau of Economic Analysis) and not on the Consumer Price Index (published by the Bureau of Labor Statistics). The Personal Consumption Expenditures (PCE) Price Index tends to be somewhat lower than the Consumer Price Index (CPI) and I do not think that the PCE will rise significantly above three percent this year. Having said that, I expect somewhat higher inflation rates for both types of indices in the medium-term than in the years before the pandemic. I think that the Federal Reserve will already start to slowly adjust its policy in the course of the second half of the year (so I think it will happen somewhat earlier than other commentators expect).
All in all, the U.S. economy will probably expand by 7.9 percent in the current year (in May, I had predicted an only slightly higher growth rate of 8.1 percent). For 2022, my current forecast indicates a growth rate of 3.6 percent.
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