Opinion: Into the trillions

The $21 trillion economic powerhouse that is the United States has taken its fair share of knocks over the last year, but massive stimulus packages have kept the world’s largest economy on track. As the US Congress prepares to enact the latest $1.9 trillion fiscal intervention, the OECD is upgrading its forecast for global growth. Richard Dawson explores

Those baulking at the £355 billion the UK Government has borrowed this financial year to get the country through coronavirus need only look at the sums of money being discussed in the United States.

Since the pandemic began, the US has funded two stimulus packages that are actually bigger than the annual GDP of the UK.

President Joe Biden has his sights set on a third – the American Rescue Plan Act of 2021.

At $1.9 trillion, it is slightly smaller than its predecessors – the $2.2 trillion CARES Act and the $2.3 trillion Consolidated Appropriations Act – both of which were the largest US spending measures since 1945.

But the latest COVID-19 relief bill is still far more ambitious than anything being done anywhere else in the world.

It is currently working its way through the US Congress, with the House of Representatives set to give the legislation final approval today (March 10).

If it passes, it will push the US budget deficit into the stratosphere.

In 2020, US Government borrowing reached a record $3.13 trillion (£2.26 trillion), equivalent to 14.9 per cent of GDP.

Early projections for 2021 point to an equally unprecedented $2.3 trillion fiscal shortfall, and that’s not even taking President Biden’s stimulus package into account.

Such is the enormity of US Government spending that the Organisation for Economic Coordination and Development (OECD) has upgraded its outlook for global growth in the year ahead.

The Paris-based institution of 37 countries said in its interim report that US stimulus alone will boost global GDP by 1 per cent this year.

Following a 3.4 per cent contraction in 2020, the OECD now expects the global economy to grow by 5.6 per cent in 2021 and 4 per cent in 2022.

This is primarily due to expectations of a strong recovery in the US, which could grow by 6.5 per cent in 2021 – 3 per cent higher than previously forecast.

US growth is being powered by the enormous, trillion dollar stimulus measures mentioned above, and by a vaccination programme that has seen some 92 million people inoculated.

The rebound is expected to have demand spillovers for key US trading partners, which is why the outlook for the UK economy has also been upgraded.

According to the OECD, UK GDP could grow by 5.1 per cent this year. This is 1.1 per cent higher than the most recent figure from the Office for Budget Responsibility (OBR).

The country with the best growth prospects for 2021 is India, which could see a 12.6 per cent expansion.

China and Turkey were the only OECD countries to grow in 2020, by 2.3 per cent and 1.8 per cent respectively.

As a continent, Europe was worst affected by the economic effects of coronavirus, with the impact in the Asia Pacific region considerably milder due to more effective containment measures and a swifter return to normal output levels.

Europe has also witnessed a more dramatic downturn than the US, despite the latter having by far the worst COVID-19 death toll in the world.

Massive and sustained fiscal policy has played a big role in America’s economic comeback, as have improved financial conditions.

US financial markets have continued to outperform the wider economy, with the S&P 500 having hit new all-time highs following the historic market crash last March.

The FTSE100, by contrast, is still trading around 1000 points below its pre-pandemic peak.

The OECD is adding its weight to the call for governments around the world to hold their nerve and maintain their unprecedented fiscal and monetary policy stances.

“A premature tightening of fiscal policy must be avoided,” the interim report says.

“The current very accommodative monetary policy should also be maintained and allow temporary overshooting of headline inflation provided underlying price pressures remain well contained.”

This is the big concern for the global economy as we move out of the acute phase of the crisis.

With so much liquidity being pumped into the financial system, the risk of inflation grows with each passing day.

As well as pushing prices higher, soaring inflation would put the central banks under pressure to raise interest rates, making the debts which individuals, businesses and government have taken on in the last year, much less affordable.

The OECD believes that, as it stands, the inflationary risks are superseded by the need to support economies crippled by COVID-19 lockdowns, but as the public health situation improves, the balance will be much harder to get right.

The enactment of President Biden’s $1.9 trillion stimulus package today will undoubtedly have an impact on inflation, but it’s seen as a price worth paying for GDP gains not just in America, but across the world.