The American economic recovery in the international context

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(MENAFN-Caribbean News Global)

WASHINGTON, USA – The post-pandemic economic recovery in the United States has been historic compared to previous episodes and has also been robust compared to recoveries in many other major advanced economies. And while a counterfactual recovery is impossible to observe, research suggests that the actions taken by the Biden administration have contributed significantly to the pace of the recovery and the strength of the labor market. Other advanced economies have also taken significant policy measures to respond to the pandemic that have supported their economic recovery.

This blog compares the U.S. recovery along five key characteristics with other advanced economies:

  • The size of the US economy has exceeded its pre-pandemic level;
  • Despite higher growth, inflation in the United States is now comparable to that of most major advanced economies;
  • Partly due to differences in labor market institutions, the US jobs recovery has been exceptionally strong;
  • Rapid economic growth has led to a particularly rapid improvement in the US fiscal position;
  • The United States is better placed than others to weather commodity shocks.

This does not mean that the current recovery is without challenges or that it is complete. Short-term inflation remains a concern, with core inflation even higher in the US, and long-term structural challenges remain. Yet many aspects of the US recovery point to a stronger US recovery.

The fastest US economic recovery in the G7

On average, real GDP in the G7 countries has now returned to its pre-pandemic level in the fourth quarter of 2019. However, there is considerable variability across countries. Not all G7 economies have returned to pre-pandemic size; in contrast, real GDP in the United States is now 2.8% higher than at the end of 2019.

Compared to pre-pandemic trends, growth in all G7 countries continues to lag. On average, real output in G7 countries remains 3.9% below trend. The US performed better than other G7 economies (and the Eurozone) with real GDP just 1.8% below trend. It is also important to note that the United States uses a greater share of its available resources: the American output gap (the difference between what the economy produces and what it can potentially produce) is smaller than the half the size of the next best performing economy in the G7. Keeping labor employed and capital employed will help avoid scarring and position the US economy well for the future.

GDP comparisons may actually underestimate the pace of recovery in the United States. In the chart above, the orange bars show another measure of output suggesting the US has done even better. Using real gross domestic product (GDP), which is an average of gross domestic income (GDP) and GDP, the US is effectively back (0.1% below) to its pre-pandemic trend. Unlike the United States, the United Kingdom and Canada, for which GDO estimates are also available, do not show substantial differences between the other output measures.

The faster recovery in the United States reflects a fuller recovery in domestic consumption. U.S. household consumer spending returned to its pre-pandemic trend in the second quarter of 2021. However, household consumption remains below the pre-pandemic trend in most other advanced economies as the recovery of the final application remains incomplete.

Despite higher growth, US inflation is now on par with most other major advanced economies

Faster output growth in the United States has been accompanied by higher inflation, but inflation rates have also risen rapidly in Canada, the United Kingdom and the Eurozone. Headline inflation rates (on a harmonized basis) are around 9% in the US and the UK, close to 8% in Germany, 7% in the Eurozone and close to 7% in Canada. Inflation rates rose rapidly in Europe in the first four months of 2022 due to a combination of high natural gas prices and the restart of the European economy after strict Covid restrictions during the Delta and Omicron waves .

A larger share of inflation in Europe was attributed to energy, reflecting the fact that oil is a globally traded commodity and that the prices of natural gas and electricity in Europe rose more strongly than in the United States. On a harmonized basis, core inflation (i.e. inflation excluding food and energy) is 4% in Germany and the euro zone, compared to just under 7% in the United States. Core inflation in Canada (not available on a harmonized basis) is 4.5%. Like headline inflation, core inflation rates have been rising faster in recent months, coinciding with a broader reopening of the economy. Compared to the United States, Europe and Canada had imposed stricter Covid restrictions until 2021, manifesting in a slower recovery in GDP growth, a larger output gap and lower core inflation. .

The job recovery in the United States has been exceptionally strong

Employment statistics appear to show stark differences between G7 economies in the age of Covid. For example, the United States and Canada saw their unemployment rates soar in April and May 2020 – up 11.1 and 7.6 percentage points from December 2019, respectively – while many European unemployment rates have remained relatively stable. In fact, in France and Italy, unemployment rates fell markedly in the first months of the pandemic.

Despite initial impressions, this did not reflect a significant divergence in work activity. Rather, these trends reflect differences between national labor institutions. Each government used its existing institutions to support workers and businesses during the initial Covid shutdown. In the United States and Canada, unemployment insurance was best suited for rapid and large-scale support. Many European economies also leveraged their social safety nets, often in ways that led to continued employment in official statistics – analogous to the little-used Workshare program in the United States.

Official statistics from most other G7 economies do not show a sharp rise in the unemployment rate in the spring of 2020, nor a corresponding robust recovery. Again, this is partly the result of differing labor market institutions and policies during the pandemic, rather than a reflection of underlying differences in labor activity. The United States now has an unemployment rate that sits just 0.1 percentage points above its lowest level in 50 years. Germany saw similar lows, while Canada and the UK are also near their lows.

The similar recovery in employment despite disparate recoveries in output has implications for labor productivity. Labor productivity in the United States has outstripped labor productivity growth in Europe and Japan. Here, labor market policies can play a role. The American system based on unemployment insurance may have allowed for greater redistribution of labor than systems that preserved attachment to the employer. In general, employment in the United States has shifted from low-wage industries to higher-wage/higher-productivity industries. Employment in the United States has also shifted to industries with higher average hours worked, implying a stronger recovery in hours relative to employment. This reallocation of labor could lead to further gains in labor productivity in the future.

Rapid economic growth has led to a particularly rapid improvement in the US fiscal position

The US fiscal situation has improved faster than most other advanced economies due to the speed of the US recovery. According to the most recent forecast from the CBO, the deficit is expected to decline by $1.7 trillion between fiscal year 2021 and fiscal year 2022 – the fastest decline in the deficit on record. The deficit in the first quarter of 2022 fell to just 1.4% of GDP as tax revenues increased in the United States.

As the figure shows, US deficits during the pandemic were generally higher, reflecting a broader and stronger fiscal response. However, deficits contracted faster in late 2021 and early 2022, with pandemic support largely ending in the third quarter of 2021. The CBO’s most recent fiscal projections see the deficit fall to 4% of GDP and stay close to that – well below the two pandemic levels. and even below the Administration’s estimates for the fiscal year 2023 budget.

The United States is better positioned than many countries to withstand commodity shocks

In all likelihood, the United States is better placed than its main partners to withstand the impact of high prices for energy and other raw materials. As a major producer of crude oil, petroleum products and natural gas, the United States is experiencing a more moderate impact on its growth due to higher energy prices. While high energy prices negatively impact consumers’ disposable income similarly in advanced economies, the growth impacts are muted for the United States as high prices incentivize greater investment in energy. energy production. Other mitigating factors include higher growth in exports of energy products and a beneficial effect on the terms of trade (price of exports relative to price of imports).

The figure shows oil consumption and production for the United States, G7, and China, taking averages from 2015 to 2019, as reported by the Energy Information Administration (EIA). With the exception of Canada, every economy consumes more than it produces and depends on imports from major producers like Russia and Saudi Arabia. Although the US is a modest net importer of crude oil, US production is significant and insulates the US economy from energy price shocks.

The main European economies, as well as Japan and China are highly dependent on imports; as prices rise, import prices rise, and moreover, the fall in production in the energy-consuming industries is not offset by a rise in production in the energy-producing industries.

– Undersecretary for Economic Policy Benjamin Harris and Deputy Undersecretary for Macroeconomics Neil Mehrotra

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