The U.S. ascent ends — at least for now — China’s long reign as the principal engine powering the $90 trillion global economy.
Free spending by the Biden administration — coupled with the Federal Reserve’s ultralow interest rates — is driving the nascent U.S. boom and lifting other countries, where governments have not responded as aggressively to the pandemic. As Americans spent their $600 government stimulus checks in January on furniture, laptops and clothing, the U.S. imported a record $221 billion worth of goods. And that was before a round of $1,400 checks in March.
“We are ahead of the world,” said Kristin Forbes, who was one of President George W. Bush’s White House economic advisers. “And a meaningful share of the stimulus is likely to leak abroad.”
Fresh evidence of the U.S. outperformance appeared on Friday as the Labor Department reported that the economy had gained 916,000 new jobs in March and that the unemployment rate fell to a post-recession low of 6 percent. The Institute for Supply Management’s gauge of manufacturing activity released on Thursday hit its highest mark since December 1983.
These signs of U.S. strength came as Europe’s economic rebound stalled amid surging coronavirus case totals. France last week announced its third national lockdown; Germany and Italy have imposed partial restrictions on activities.
Accelerating progress in vaccinating people against the coronavirus, plus more generous government spending, explains the U.S. edge. As of the end of March, the United States had vaccinated more than twice as large a share of its population as had the European Union.
Most economists expect China this year to grow at a faster annual rate than the United States. But since the $21 trillion U.S. economy is still significantly larger than China’s, measured in dollars, the American contribution to global growth will be slightly larger, according to Oxford Economics.
To be sure, the U.S. outlook is far from worry-free. Some economists, such as Lawrence Summers, once President Barack Obama’s top economic adviser, say the administration has done too much to spur the economy and is inviting an inflationary price spiral.
The recovery from the pandemic shock also is incomplete: More than 8 million Americans who were working in early 2020 are unemployed and an additional 4 million have quit the labor market.
A strengthening U.S. economy, however, is welcome after a year of pandemic gloom. But as expectations of strong growth drive up long-term interest rates, investors are pulling money out of emerging markets to earn higher returns in the United States. More than $5 billion left developing countries in March, which some analysts worry could herald larger outflows to come and undermine recovery prospects in poor and middle-income nations.
“It’s a double-edged sword,” said Maurice Obstfeld, an economics professor at the University of California at Berkeley. “The effect of higher U.S. demand is spilling over to imports from other countries. But as U.S. growth leads to higher long-term interest rates, that’s a big negative for these countries.”
Kristalina Georgieva, managing director of the International Monetary Fund, warned in a speech last week that the U.S. and Chinese economies could leave behind poorer nations in a “multispeed recovery.” By next year, emerging markets are likely to have suffered a 20 percent loss in per-person income, almost twice the figure in the industrial world, according to IMF data.
“Prospects are diverging dangerously not only within nations but also across countries and regions,” she said.
On Monday, global finance officials and central bank chiefs are scheduled to kick off the annual spring meetings of the IMF and World Bank, where Georgieva plans to release a rosier 2021 forecast.
The U.S. role in leading the global economy this year contrasts with the aftermath of the 2008 financial crisis, when China unleashed a massive stimulus program that funded new railroads, airports, roads and public housing programs. The construction splurge rained money on commodity-producing countries, helping avert a more punishing global downturn.
In the United States, a fierce debate about the rising federal budget deficit short-circuited stimulus spending and left the U.S. share of global growth by 2010 at just half of this year’s forecast of 28 percent, according to Oxford Economics.
Congress in March approved the Biden administration’s $1.9 trillion American Rescue Plan. Together with a $900 billion bill in December, it will add almost 1.5 percent to the global economy’s growth rate this year, according to the Organization for Economic Cooperation and Development.
“This will not only benefit the U.S. economy, but it will fuel global growth,” Laurence Boone, the OECD’s chief economist, said last month.
The impact of the U.S. government rescue plan will be felt in India, Australia, South Korea, the United Kingdom, Canada and elsewhere, the OECD said.
By the end of next year, global output will be $3 trillion larger than it would have been without the new U.S. spending, Boone said. That’s akin to adding another “France” to the global economy.
Aided by government stimulus payments, Americans have been spending freely on imported consumer goods, foods, beverages and animal feed, according to the Census Bureau. Thanks to last year’s stimulus legislation, consumers have accumulated about $1.7 trillion in savings, which could be spent as the economy reopens. Even as millions suffered over the past year, household net worth rose by $18 trillion, according to the Federal Reserve.
U.S. businesses also stepped up purchases of imported auto parts from China and industrial machinery, which arrives from the busy Dutch port in Rotterdam.
But it’s not just Americans’ spending that is helping other economies. The Federal Reserve’s near-zero interest rates, designed to spur business activity through cheaper borrowing, benefit foreign corporations along with American ones.
Alibaba, the Chinese Internet giant, raised $5 billion in the U.S. corporate bond market last month at rates as low as 2.1 percent. The company said it planned to use the proceeds for general corporate purposes, including “working capital needs, repayment of offshore debt and potential acquisitions of or investments in complementary businesses.”
Likewise, Landwirtschaftliche Rentenbank, a German government-backed development bank for rural areas, paid less than 1 percent interest to raise $1.75 billion.
Any bragging rights for the United States this year are likely to be limited. China, which led the initial global rebound last year after containing the pandemic, is expected to regain the top spot in 2022, according to Oxford Economics.
China has contributed more to global growth than the United States each year since 2000, according to the IMF, whose calculations differ from those of the private research firm.
“China was leading the recovery last year and the U.S. is picking up the baton this year,” said Adam Posen, president of the Peterson Institute for International Economics. “It would be good if Europe picked up the baton in 2022-23.”
As foreign investors pile into U.S. stocks and bonds, seeking to benefit from the roaring economy, the dollar is defying its predicted decline. The greenback is up roughly 10 percent against the euro this year and almost 8 percent against the yen.
The rising dollar is acting like a price cut on European and Japanese goods. But it’s made American products more expensive for customers in overseas markets, chilling U.S. exports and causing the trade deficit to balloon.
Unlike his predecessor, President Biden has not made shrinking the gap between the cost of U.S. imports and the smaller amount of the country’s exports a central aim. But the fatter deficit means that trade this year will be a net negative for the United States, subtracting about 1 percent from an annual growth rate that the OECD pegs at 6.5 percent.
(That compares with an OECD forecast of 3.9 percent for the E.U. and 2.7 percent for Japan.)
Economists at Goldman Sachs expect the broadest measure of the trade balance, the current account deficit, to peak late this year at 4.4 percent of gross domestic product. That would be its highest level in 15 years and twice the 2019 figure.
An economy running hot already has pushed up long-term interest rates, as investors bet on growth or worried about inflation. The rate on the 10-year Treasury, a bond market benchmark, has risen to 1.67 percent from 0.91 percent at the end of 2020.
If long-term U.S. interest rates rise sharply — either because investors fear inflation or the Fed is forced to cool a roaring economy sooner than planned — the consequences could be dire for heavily indebted developing nations.
This year, 120 developing countries are scheduled to repay $1.1 trillion in debt. But 72 of those countries may not be able to pay those bills without sacrificing spending on vaccinations or economic relief.
The pandemic has pushed more than 100 million people into “extreme poverty,” with one-quarter billion suffering “acute hunger,” World Bank President David Malpass said last week.
Central banks in Brazil, Turkey and Russia already have hiked interest rates to curb inflation, prevent financial outflows or both. And economists at BNP Paribas anticipate additional rate increases, including in Latin America, which will weigh on economic rebounds. Developing nations’ financial distress could weigh on the global recovery.
“We are facing an increasingly severe situation,” Achim Steiner, administrator of the United Nations Development Program, told reporters last week. “It is far from over. It is, in many parts of the world, getting worse.”