The United States leads a soft landing for the global economy

The world begins 2024 on an optimistic economic note, as inflation fades globally and growth remains more resilient than many forecasters expected. However, one country stands out for its surprising strength: the United States.

After a sharp rise in prices that shook the world in 2021 and 2022 – fueled by supply chain disruptions linked to the pandemic, then surges in oil and food prices linked to the invasion of Ukraine by Russia – many countries are now seeing falling inflation. And it’s happening without the painful recessions that many economists expected when central banks raised interest rates to keep inflation in check.

But the details differ from place to place. Forecasters from the Federal Reserve to the International Monetary Fund have been surprised by the remarkable strength of the U.S. economy, while growth in countries like the United Kingdom and Germany remains more lackluster. The question is why America fell ahead of the other developed economies in the pack.

The IMF said this week it expected growth of 2.1 percent in the United States, a marked improvement from the 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.

“It’s a good situation, let’s be honest, it’s a good economy,” Jerome H. Powell, chairman of the U.S. Federal Reserve, said at a news conference this week – twice out of nearly 20 times where he called the data “good” during his speech.

Evidence of that strength continued Friday, when a blockbuster jobs report showed that employers added 353,000 jobs in January and wages rose at a rapid pace.

America’s outperformance is the result of a combination of luck and judgment, economists say. Below is a look at some of the factors behind this relatively strong performance – starting with those that reflect political choices and moving on to factors that owe more to fortune.

Part of the reason economic growth has been so surprisingly strong in the United States is simple: The U.S. government has continued to spend a lot of money.

Government spending as a percentage of overall output hovered around 35% in the United States in the years before the pandemic, according to IMF data. But in 2020 and 2021, they jumped 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 only slowly spent the savings they had accumulated during these pandemic years, so money continued to flow into the economy like a slow-release booster shot. Additionally, government spending remained high as the Biden administration began making significant investments in infrastructure and climate.

“As the economy recovered, the United States simply poured more kerosene on the fire,” said Kristin Forbes, an economist at the MIT Sloan School of Management and former Bank of England official.

Ms. Forbes pointed out that America deficit as a proportion of its gross domestic product is larger than that of many other advanced economies, and today’s spending adds to America’s debt burden. Under these conditions, strong growth today could come at a cost, including higher interest bills, in the future.

Administration officials suggested the tradeoff was worth it.

Lael Brainard, who heads President Biden’s National Economic Council, told reporters last week that the combined spending allowed families to “get through this really disruptive time and bounce back.”

Yet government spending does not fully explain the divergence between the United States and other economies. Other countries I also spent a lot in response to the pandemic, and in countries like the Eurozone and the United Kingdom still spend more than before the pandemic in recent years, as a share of production.

Jan Hatzius, chief economist at Goldman Sachs, said he thinks gross domestic product data — which can be volatile and revised — could overestimate the divergence between U.S. growth and that of other countries. But to the extent that there is a gap, he doesn’t think government spending has been a significant driver of America’s better performance over the past year.

Instead, a number of economists said, what’s happening might be due in part to differences in policy design — and to luck.

America took a different approach than its European peers in how it designed relief policy for workers displaced by pandemic-related shutdowns: It paid workers to stay home, with one-time checks and expanded unemployment insurance, while countries across Europe have paid workers to stay home. stay in employment.

The resulting churn, as Americans moved to 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.

Beforehand, “it wasn’t clear what the best path forward would be,” Posen said, noting that many economists were concerned that the U.S. approach would actually produce slightly worse results. “As always, it’s better to be lucky than to be good.”

Other advanced economies have also suffered misfortune. European countries have been much more exposed to the aftershocks of Russia’s 2022 invasion of Ukraine, a conflict that has driven up gasoline and food prices, upending the business environment and limiting the ability of households to afford other discretionary products.

While the United States imported relatively little oil and gas from Russia, this was not the case from Europe. According to a 2023 survey According to 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 seeing the same increase.

Speaking to the American Chamber of Commerce on Tuesday morning, Valdis Dombrovskis, the EU Trade Commissioner, said that Europe was working to reduce its dependence on Russian fossil fuels, but that severing those ties “had a cost “.

Kristalina Georgieva, managing director of the IMF, told reporters on Thursday that the resilience of the U.S. economy was the result of several factors, including insulation from volatility in global energy markets.

“Good economic forces and favorable winds are blowing the sails of the United States,” Ms. Georgieva said.

Today, tensions in the Red Sea disrupting maritime routes could have greater impact on Europe. The disruptions began to drive up shipping prices and delay deliveries, particularly for goods from Asia to Europe.

Biden administration officials are monitoring these disruptions, but they are less concerned because they are “a little less significant to U.S. supply chains than to other parts of the world,” Ms. Brainard said.

When it comes to the absolute level of U.S. growth compared to advanced economies like the Eurozone and Japan, America also benefits from a younger population. THE Middle Ages in the United States it is around 38.5, while it is 46.7 in Germany and 49.5 in Japan.

Youth contributes to creating a more dynamic economy: Young adults are working more and families with children are buying homes and building their lives spend more than retirees.

Whatever the cause of this divergence, it could have an impact on economic policy.

The Fed, European Central Bank and Bank of England are all working to cut interest rates to avoid undermining growth. Central bankers do not want to cut rates too soon and are unable to completely stem inflation. They also want to avoid keeping them too high for too long, which would inflict more pain than necessary to control rising prices.

For the ECB and the Bank of England, a slowdown in growth could make this process particularly delicate: policy errors could tip these economies from slight growth to slight contraction. But completing this soft landing poses 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 interest rates remaining high for longer,” Ms Georgieva said. “They now need to land the plane smoothly.”