As US worries about inflation, growth elsewhere faces lasting damage
As investors weigh and reassess the chances of the U.S. economy being overheated, they need to remember that the rest of the world is not about to recover from the pandemic.
Globally, the economic outlook has improved, thanks to the rise in immunization. On Tuesday, the Organization for Economic Co-operation and Development raised its forecast for global gross domestic product growth to 5.8 percent for this year and 4.4 percent for next year, from 4.2 percent and 3, respectively, 7% for December.
Markets fear at least a small chance that the economy is overheating, given that Washington’s tax transfers have left the average American household with higher disposable income than before. Inflation measures have exploded in the United States and are also on the rise in the eurozone, peaking at 3 years at 2% in May, data showed on Tuesday. Surveys of purchasing managers in the manufacturing sector, which recorded their highest level ever, highlighted shortages in the supply chain.
This concern about excessive economic growth, however, is a first world problem – and, even there, an unbalanced problem.
The United States is the only major country in which Wall Street forecasters’ expectations for 2025 GDP are currently higher than they were in January 2020. In other developed countries that have embraced fiscal activism Like Canada, Japan and Germany, the economy is expected to be between 0.8% and 0.5% smaller than in the pre-pandemic projections. The figure is closer to 4% for the UK and France.
The gap is the largest among emerging countries. After avoiding some of the initial impact of Covid-19, these nations are now at high risk. India was badly degraded by forecasters after being ravaged by a second wave. They now estimate that its 2025 GDP will be 9% lower than previous estimates.
In Tuesday’s report, the OECD worried that much of the lost economic output could be caused by a “permanent” reduction in the ability to produce goods and services – so-called scars – rather than a deficit in demand. Yet it also identifies the most scars in poor countries, which, in addition to having more limited access to vaccines, may less easily roll out fiscal measures without angering currency markets. Other countries where the OECD sees large losses on the supply side are those that depend on tourism – an industry which, despite its current woes, is not really vulnerable to permanent damage.
Calculations of “potential output” are noticeably slippery and often reflect only recent economic trends rather than any upper bound on growth. Today’s tax activism is in part a recognition that problems once linked to production constraints could stem from low spending. Even US growth, which is currently accelerating, remains well below its pre-2008 trend. The implication is that abandoning expansionary policies prematurely is what really risks damaging the economy.
As developed countries emerge from the pandemic, an encouraging surge in spending is creating bottlenecks. Looking further ahead, it is still a shortage of demand, not supply, that poses the greatest threat to the global economy.
Write to Jon Sindreu at [email protected]
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