The soft landing is global, but softest in America
The world is starting 2024 on an optimistic economic note as global inflation declines and growth remains more resilient than many forecasters expected. Yet one country stands out for its surprising strength: the United States.
After a sharp price increase rocked the world in 2021 and 2022 – fueled by supply chain disruptions caused by the pandemic, and then spikes in oil and food prices due to Russia's invasion of Ukraine – many countries are now seeing inflation decreases. And that will happen without the painful recessions that many economists expected when central banks raised interest rates to control inflation.
But the details vary from place to place. Forecasters from the Federal Reserve and the International Monetary Fund are most surprised by the remarkable strength of the US economy, while growth in countries such as Britain and Germany continues to remain weaker. The question is why America has retreated from the pack compared to other advanced economies.
The IMF said this week that it expected the United States to grow by 2.1 percent, a sharp increase from its previous estimate of 1.5 percent. Other major advanced economies are also expected to grow, albeit less rapidly. The Eurozone is expected to grow by 0.9 percent, as is Japan, and the United Kingdom is expected to grow by 0.6 percent.
“This is a good situation, let's face it, this is a good economy,” Jerome H. Powell, the chairman of the U.S. Federal Reserve, said at a news conference this week — two of nearly two dozen times he mentioned the data “good” during his remarks.
Evidence of that strength continued Friday, when a landmark jobs report showed that employers added 353,000 jobs in January and wages were rising rapidly.
America's outperformance is due to a combination of luck and judgment, economists say. Below is an overview of some of the factors behind the relatively strong performance – starting with those that reflect policy choices and moving on to factors that owe more to fortune.
One reason for American resilience: fiscal policy.
Part of the reason that economic growth in the United States has been so surprisingly strong is simple: the U.S. government has continued to spend a lot of money.
According to IMF data, government spending as a share of total output in America hovered around 35 percent in the years leading up to the pandemic. But in 2020 and 2021, they rose above 40 percent as the government responded to the coronavirus with about $5 trillion in aid and stimulus for people, businesses, institutions, and state and local governments.
States and households alike have been slow to spend the savings they accumulated during the years of the pandemic, so the money has continued to trickle through the economy like a slow boost. Moreover, government spending has remained high as the Biden administration has begun making large-scale investments in infrastructure and climate.
“As the economy recovered, the US just threw 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 budget deficit as a percentage of gross domestic product is larger than many other advanced economies, and current spending is adding to the pile of U.S. debt. Given all that, strong growth today could come at a cost, including higher interest charges.
Government officials have suggested the trade-off was worth it.
Lael Brainard, chairman of President Biden's National Economic Council, told reporters last week that the combined spending had allowed families to “get through this really disruptive period and bounce back.”
Yet government spending cannot fully explain the differences between the United States and other economies. Other countries also spent a lot in response to the pandemic, and places like the Eurozone and the United Kingdom still spend more than before the pandemic in recent years, as a percentage of production.
Jan Hatzius, chief economist at Goldman Sachs, said he believed the gross domestic product data — which can be volatile and subject to revision — could overestimate the difference between U.S. growth and other countries. But to the extent there is a gap, he doesn't think government spending has been a big driver of stronger U.S. performance over the past year.
Instead, a number of economists said, what is happening could be partly due to differences in policy design – and luck.
Responses to pandemics have not been equal.
America took a different approach than its European peers in how it designed policy relief for workers displaced by pandemic shutdowns: It paid workers to stay home, with one-time checks and expanded unemployment insurance, while countries in Europe paid to stay home. stay in jobs.
The resulting churn as Americans have sorted themselves 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, DC.
Beforehand, “it wasn't clear what the better path would be,” Mr. Posen said, noting that many economists had worried that the U.S. approach would actually perform slightly worse. “As always, it's better to be lucky than to be good.”
The proximity to geopolitical issues is also important.
Other advanced economies have also suffered setbacks. European countries are far more exposed to the aftershocks of Russia's 2022 invasion of Ukraine, a conflict that has sent gas and grocery prices soaring, roiling the business environment and affecting households' ability to afford other durable products , are limited.
While the United States imported relatively little oil and gas from Russia, that was not the case for Europe. According to a 2023 study According to the European Investment Bank, 68 percent of companies in the European Union had seen their energy prices increase by 25 percent or more, while 30 percent of U.S. companies experienced the same increase.
Speaking to the U.S. Chamber of Commerce on Tuesday morning, Valdis Dombrovskis, the European trade commissioner, said Europe has been working to address its dependence on Russian fossil fuels, but that cutting those ties “came at a cost.” .
Kristalina Georgieva, managing director of the IMF, told reporters on Thursday that the US economy's resilience stemmed from several factors, including insulation from volatility in global energy markets.
“There have been good economic forces and there is a wind in America's sails,” Ms. Georgieva said.
Now tensions in the Red Sea, which are roiling shipping lanes there, could have bigger spillover effects for Europe. The disruptions have driven up shipping costs and delayed deliveries, especially for goods traveling from Asia to Europe.
Biden administration officials are monitoring these disruptions but are less concerned because they are “somewhat less noticeable to U.S. 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 compared to advanced economies like the Eurozone and Japan, America also has the advantage of a younger population. The average age in the United States it is about 38.5, while in Germany it is 46.7 and in Japan 49.5.
Youth helps to create a economy more dynamic: Younger adults are working more, and families are having children, buying homes and building lives spend more than retirees.
All this can be important for policy.
Whatever is causing the divergence could be important for economic policy.
The Fed, the European Central Bank and the Bank of England are all trying to cut interest rates as they try to undermine growth. Central bankers do not want to cut interest rates too early and are unable to completely eradicate inflation. They also want to avoid staying too high for too long, causing more pain than is necessary to control price increases.
For the ECB and the Bank of England, slower growth could make this a particularly delicate process; policy mistakes could tip these economies from mild growth to mild contraction. But completing the soft landing is a looming challenge for many central banks.
“At this time in the cycle, there is a risk of premature easing, but there is also a risk of interest rates staying high for longer,” Georgieva said. “They now have to land the plane smoothly.”