Red-Hot US economy a mixed blessing for the rest of the world
By Paul Hannon and Mike Bird
A powerful recovery in the United States, sparked by massive government spending and rapid vaccine roll-out, is already rippling through the world, illuminating the economic outlook for countries closely linked to the U.S. economy.
But economists say the coming U.S. boom could portend a two-speed recovery from last year’s extraordinary economic downturn, a schism that threatens to open cracks in the global economy.
While lockdowns and restrictions from Covid-19 hit many economies last year to about equal extent, early evidence shows that the exit from the pandemic could be highly unbalanced.
Rich countries and some export-oriented economies are already enjoying the first fruits of successful vaccination campaigns and resurgent growth.
Instead, poor countries are seeing nascent signs of capital outflows attracted to rich countries. Meanwhile, these countries face a long wait for vaccines and some are experiencing new waves of Covid-19 that leave them cut off from the travel and tourism flows that have supported their economies in recent years.
The US economy is expected to grow about 6.5% this year, the fastest since 1984. This surge could leave the US economy even bigger at the end of this year than it was before the pandemic, according to the Organization for Economic Cooperation and Development.
No other major economy, not even China, is likely to boast of this. Economists expect the United States to be the main engine of global growth this year.
The American vaccination program, faster than those of most countries in Europe and Asia, has allowed a faster return to normal economic activity. But the decision of the United States to pursue a much larger second round of relief and stimulus was particularly decisive. Very few other rich countries have spent as much as the United States, and poor countries cannot afford such largesse.
A booming US economy in turn accelerates recovery elsewhere, especially for export-oriented countries selling products to US buyers.
It’s a godsend for countries like Vietnam. The US stimulus alone will add 1.4% to Vietnam’s gross domestic product over the next two years, just behind the slightly larger impact on Mexico, according to estimates from financial services firms Allianz and Euler Hermes. This will help offset the blow that Vietnam – which largely contained cases of Covid-19 – suffered from a tourism slump.
In Thailand, exports are expected to increase 3% to 5% this year, with 10% to 11% sales growth in the United States expected to offset minor declines in Europe and China, according to Supan Mongkolsuthree, chairman of the Thai Federation. Industries.
Thailand’s auto parts industry, Southeast Asia’s largest, could rebound to around $ 22 billion in overseas sales this year, returning to 2019 levels after falling 14% year-on-year latest, according to the Thai Auto Parts Manufacturers Association, with US demand for tires helping to support the recovery.
The strength of the recovery in the United States is putting increased pressure on already stretched and globally spanning supply chains that supply everything from smartphones to children’s clothing.
Brompton Bicycle Ltd. is a London-based manufacturer of folding bikes popular with commuters in his hometown. It hired new workers and added a third production line during the pandemic.
But even if it allocates a “preferential” share of its production to the United States as it contemplates a big expansion in key cities such as New York, Chicago and San Francisco, it cannot meet the demand. Finding parts from Asia became a problem, as did shipping.
“Demand grows before supply,” said Stephen Loftus, Brompton chief commercial officer. “We face a lot of frustrations on a daily basis.
These frustrations are likely to worsen in the immediate future, thanks to delays caused by the stranded cargo ship which recently halted traffic in the Suez Canal. “We don’t know the ripple effects of this yet, but it will affect everyone,” Mr. Loftus said.
While American growth will lift many boats, it will not lift them all. For example, the boost will likely be modest for Europe, with European Central Bank economists estimating that US stimulus measures will push euro area economic growth to 4.1% from 4% this year and to 4.3% against 4.1% in 2022.
The eurozone, where vaccinations run at a freezing pace, is expected to be mired in an economic slowdown for months to come – a sharp divergence with the United States that could leave lasting scars on the labor market or on investments in capital.
Meanwhile, the world’s poorest countries are unlikely to immunize much of the population for months, if not years, to come. This will leave many people cut off from the tourism industry which has created jobs and boosted economies in recent years.
Clayton Fletcher, who runs a luxury safari and hunting lodge in South Africa’s North West Province, survived 2020 by killing animals, selling meat and snagging fares for local hunters . He took out bank loans to continue paying his staff.
In February, the lodge hosted its first international tour groups since November 2019, but has so far had 16 cancellations for this year from the United States, Canada and Europe.
“Our business depends on other countries,” said Mr. Clayton. More contagious variant first identified in South Africa has worsened prospects for his business “With this new strain here, unfortunately people are scared,” he says.
Even though the United Nations Conference on Trade and Development last month raised its growth forecast for the United States for this year, it lowered its projections for Africa. Indeed, Africa’s economy is expected to grow more slowly than that of the United States, a gap that will be larger on a per capita basis as the continent’s population grows at a faster rate.
“Covid-19 has hit the poor like wildfire,” World Bank president David Malpas said in a virtual speech at the London School of Economics. “In the pandemic of inequality, the poorest countries fall even further behind.”
The strength of the US recovery could further exacerbate these disparities if the new wave of government spending pushes inflation up sharply and forces the US Federal Reserve to raise its policy rate much sooner than it hoped today. .
Due to the disproportionate role of the US dollar in global finance and trade, such a move by the Fed would also increase borrowing costs for many countries where recoveries are expected to be much slower.
“What the United States is doing in terms of massive fiscal stimulus combined with relatively loose monetary policy is generally good for the world,” said Adam Posen, president of the Peterson Institute for International Economics. “The big negative side is what happens if it is a boom-bust cycle – what if we not only overheat, but are forced to tighten faster and more than the prices currently on the markets? ”
(END) Dow Jones Newswires
April 02, 2021 05:44 ET (09:44 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.