The world enters 2024 with optimism as global inflation eases and growth remains more robust than many forecasters had expected. But one country stands out for its surprising strength: the United States.
After a sharp rise in prices rocked the world in 2021 and 2022 – fueled by pandemic-related supply chain failures and then by the rise in oil and food prices related to Russia’s invasion of Ukraine – many countries are now seeing a decline in inflation. And that’s without the painful recessions that many economists expected when central banks raised interest rates to control inflation.
But the details differ from place to place. Forecasters from the Federal Reserve to the International Monetary Fund were most surprised by the remarkable strength of the U.S. economy, while growth in countries like the United Kingdom and Germany remains weaker. The question is why America was able to pull ahead of the other developed economies in the group.
The IMF said this week that it expects U.S. growth of 2.1 percent, a significant increase from the previous estimate of 1.5 percent. Other large advanced economies are also expected to grow, although at a slower pace. The euro area is expected to grow 0.9 percent, as is Japan, and the United Kingdom is forecast to grow 0.6 percent.
“This is a good situation, let’s face it, this is a good economy,” Federal Reserve Chairman Jerome H. Powell said at a news conference this week – two of nearly 20 times he cited the data. good” during his remarks.
Evidence of that strength continued Friday when a blockbuster jobs report showed that employers added 353,000 jobs in January and wages rose rapidly.
America’s outperformance is the result of a combination of luck and judgment, economists said. Below is an overview of some of the factors behind the relatively strong performance, from those reflecting policy decisions to factors more closely tied to wealth.
One reason for the resilience of the USA: financial policy.
Part of the reason economic growth in the United States has been so surprisingly strong is simple: the American government has continued to spend heavily.
According to IMF data, the share of government spending in total production in America was around 35 percent in the years before the pandemic. But in 2020 and 2021, they jumped to over 40 percent as the government responded to the coronavirus with about $5 trillion in relief and stimulus programs for people, businesses, institutions, and state and local governments.
Both states and households have been slow to spend the savings accumulated during these pandemic years, so the money continues to trickle through the economy like a slow-release booster shot. Additionally, government spending remains high as the Biden administration has begun making major infrastructure and climate investments.
“As the economy recovered, the U.S. simply poured more kerosene on 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 percentage of gross domestic product is larger than that of many other advanced economies and that today’s spending is adding to America’s debt pile. Given this, strong growth today could come with costs – including higher interest bills.
Administration officials said the compromise was worth it.
Lael Brainard, who leads President Biden’s National Economic Council, told reporters last week that the combined spending had allowed families to “get through this really turbulent time and get back on their feet.”
However, government spending does not fully explain the divergence between the United States and other economies. Other countries also spent heavily in response to the pandemic, and countries such as the euro area and the UK are still spending more relative to output than before the pandemic in recent years.
Jan Hatzius, chief economist at Goldman Sachs, said he believes gross domestic product data – which can be volatile and is subject to revision – may overstate the divergence between U.S. growth and growth in other countries. But because there is a gap, he doesn’t believe government spending was a significant driver of the stronger U.S. performance last year.
Instead, a number of economists said, what’s happening could be due in part to different policies – and luck.
America took a different approach than its European counterparts when it came to crafting policy relief for workers displaced by pandemic-related shutdowns: It paid workers to stay home with one-time checks and expanded unemployment insurance while the Countries in Europe paid workers to stay on the job.
The resulting turnover as Americans focus on new and better jobs could lead to the stronger productivity growth the United States is currently experiencing, said Adam Posen, president of the Peterson Institute for International Economics, a think tank in Washington, DC
“It wasn’t clear in advance which path would be better,” Posen said, noting that many economists had feared that the U.S. approach would actually perform slightly worse. “As always, it’s better to be lucky than good.”
Proximity to geopolitical problems is also important.
Other advanced economies have also fallen victim to the disaster. European countries were much more exposed to the aftermath of Russia’s invasion of Ukraine in 2022. This conflict has driven up gasoline and food prices, disrupted the business environment and limited households’ ability to afford other consumer goods.
While the US imported relatively little oil and gas from Russia, this was not the case for Europe. According to a 2023 survey by the European Investment Bank, 68 percent of companies in the European Union saw their energy prices increase by 25 percent or more, compared to 30 percent of U.S. companies that saw the same increase.
Speaking at the U.S. Chamber of Commerce on Tuesday morning, Valdis Dombrovskis, EU trade commissioner, said Europe has worked to reduce its dependence on Russian fossil fuels but that cutting those ties “comes with a cost.”
Kristalina Georgieva, the IMF’s managing director, told reporters on Thursday that the U.S. economy’s resilience is due to several factors – including insulation from volatility in global energy markets.
“There were good economic forces and wind blowing in the sails of the United States,” Ms. Georgieva said.
Now the tensions in the Red Sea that are shaking shipping routes there could have larger ripple effects for Europe. The disruptions have begun to drive up shipping prices and delay deliveries, particularly for goods moving from Asia to Europe.
Biden administration officials are monitoring these disruptions but are less concerned because they are “slightly less significant for American supply chains than for other parts of the world,” Ms. Brainard said.
Demographic factors play a role.
When it comes to the absolute level of growth of the United States compared to advanced economies such as the Eurozone and Japan, America also has the advantage of a younger population. The average age in the USA is around 38.5 years, while in Germany it is 46.7 years and in Japan it is 49.5 years.
Youth helps make an economy more dynamic: Younger adults work more, and families who have children, buy homes and build a life spend more than retirees.
All of this could be important for politics.
Whatever causes the divergence, it could be important for economic policy.
The Fed, European Central Bank and Bank of England are all pushing for interest rate cuts to avoid undermining growth. Central bankers don’t want to cut interest rates too early and fail to fully curb inflation. You also want to avoid prices remaining too high for too long, thereby causing more pain than is necessary to control price increases.
For the ECB and Bank of England, slower growth could make this a particularly delicate process – policy mistakes could tip these economies from modest 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 premature easing, but there is also a risk of keeping interest rates higher for longer,” Ms Georgieva said. “You need to land the plane smoothly now.”
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2024-02-02 19:37:41
www.nytimes.com
