US stimulus may bolster global growth
IMF spokesman says relief could bring ‘significant positive spillovers’
The massive stimulus spending by the United States in response to COVID-19 is forecast to have a positive economic impact around the world, although one that will vary by region.
Global economic growth is expected to rise 1.1 percentage points to 5.6 percent as a result of the relief aid — a $1.9 trillion bill signed by President Joe Biden on March 11– according to the Organization for Economic Cooperation and Development.
“This will not only boost the US economy, but it will fuel global growth through increased demand in the US and from the US to the rest of the world,” OECD Chief Economist Laurence Boone said of the stimulus at a presentation in Paris on March 9.
The relief package also includes $11 billion in international spending.
“We see potentially significant positive spillovers in terms of global growth,” International Monetary Fund spokesman Gerry Rice said at a regular news briefing on March 11. “Most countries should benefit from stronger US demand for both commodities and goods and services.… So this will help global growth and recovery.”
The OECD expects global output to rise above pre-pandemic levels by midyear, after major economies showed greater resilience at the end of 2020, and as proof of vaccine efficacy increases. The organization raised its world growth forecast for 2021 to 5.6 percent from the 4.2 percent predicted late last year and more than doubled its outlook for the US to 6.5 percent. In 2020, global output dropped 3.4 percent.
Regional markets in Asia have seized on hopes that US-China relations could brighten after the Biden administration announced on March 10 a meeting with top Chinese diplomats in Alaska on March 11.
In Asian stock markets, China’s Shanghai Composite rose 2.3 percent, Hong Kong’s Hang Seng added 1.3 percent and Japan’s Nikkei increased 0.6 percent on March 11.
That day, the Organization of Petroleum Exporting Countries increased its global oil demand forecast by up to 200,000 barrels and raised its forecast for global economic growth 0.3 percentage points to 5.1 percent. The cartel mentioned the US stimulus and “the continuing recovery in Asian economies” in its outlook.
However, there is a growing divergence between some geographic regions’ recovery forecasts. The growth rate in the 2021 forecast for the US is closer to China’s 7.8 percent than the eurozone’s 3.9 percent. Europe is on a more gradual path, with ongoing government restrictions and “relatively mild” stimulus, said the OECD, which slightly lowered the outlook for France and Italy for the year.
The European Central Bank said after its monetary policy meeting on March 11 that it would ramp up its pandemic emergency bond-buying to ease market concerns about a rise in government borrowing costs and inflation. The OECD’s forecasts for this year and next suggest that some European economies, including Italy, Spain and the United Kingdom, will not make up for lost GDP in 2022.
The US stimulus also will lift its major trading partners, boosting growth by 0.5 to 1 percentage point in Canada and Mexico, and between a 0.25 and 0.5 percentage point in the eurozone and China, the OECD said.
Emerging markets could become casualties of the relief bill, as rising US bond yields are likely to cause a reversal of capital flows from the developing world, economists warn.
The OECD said there are “sizable risks” to the outlook, as faster vaccine deployment could further boost spending and confidence, while virus mutations could inhibit the fight against the pandemic, causing larger job losses and more business failures.
That makes producing and deploying vaccines the “top policy priority”, the OECD said.
According to Boone, the OECD chief economist, Europe is suffering from poor public health management, and more fiscal stimulus without vaccinations would not be effective. In an interview with Bloomberg Television, Boone said: “Countries need to accelerate their vaccination programs to reopen … their economies (faster). If we are at war against a virus, we need to get on a wartime footing.”
Central banks also should keep extraordinarily accommodative policies in place, even if inflation temporarily surpasses targets, the OECD recommended.
Wall Street and public sector economists have revised forecasts for US economic growth upward due to the massive relief package and the vaccine rollout. But they also worry that too much stimulus could lead to an overheated economy, inflationary pressures and rising interest rates.
On top of the $900 billion relief package approved by Congress in December, Biden’s $1.9 trillion package means that the US’ economy would get fiscal stimulus of around 13 percent of its GDP this year, according to Desmond Lachman, resident fellow at the American Enterprise Institute and a former official at the International Monetary Fund. “My view is that US market interest rates, like the 10-year Treasury bond rate, will now rise significantly because of the (new) stimulus,” Lachman said.
“This will very likely cause capital to flow back to the US from the emerging markets, since investors will now be able to receive a reasonable return on safe US Treasuries.”