America's record-setting stimulus could power a rebound in other countries

The anticipated economic rebound in the United States is expected to join China’s recovery, adding impetus to world output. China’s economy is forecast to expand rapidly this year, with the International Monetary Fund predicting 8.1percent growth. That is good news for countries like Germany, which depends on Chinese demand for cars and machinery.

Yet the United States is particularly important to the world economy, because it has long spent more than it makes or sells, spreading dollars globally. China is one of the major beneficiaries of Washington’s largesse, because many Americans have spent their stimulus checks on video game consoles, exercise bicycles or other products made in China.

The United States’ comparatively fast recovery was neither guaranteed nor expected: It was the result of a little bit of luck — new variants of the virus that have coursed through other countries have just begun to push infections higher in the United States — and a large policy response, including more than $5 trillion in debt-fueled pandemic relief spending passed into law over the past 12 months. Those trends, paired with the accelerating spread of effective vaccinations, seem likely to leave the US economy in a stronger position.
“When the U.S. economy is strong, that strength tends to support global activity as well,” Jerome Powell, chair of the Federal Reserve, said at a recent news conference.

A year ago, it was not at all certain that the United States would gain the strength to help lift the global economy.

The International Monetary Fund forecast in this past April that the U.S. economy might expand by 4.7 percent this year, roughly in line with forecasts for Europe’s growth, after an expected slump of 5.9 percent in 2020. But the actual contraction in the United States was smaller, and in January, the IMF upgraded the outlook for US growth to 5.1 percent this year, while the euro area’s expected growth was marked down to 4.2 percent.

Since then, the US government has passed a $1.9 trillion relief package, and the IMF has signaled that the estimates for the country’s growth will be marked up further when it releases fresh forecasts April 6.

The recent relief package continues a trend: America has been willing to spend to combat the pandemic’s economic fallout from the start.

America’s initial pandemic response spending, amounting to a little less than $3 trillion, was 50 percent larger, as a share of gross domestic product, than what the United Kingdom rolled out, and roughly three times as much as in France, Italy or Spain, based on an analysis by Christina Romer at the University of California, Berkeley.

Among a set of advanced economies, only New Zealand has borrowed and spent as big a share of its GDP as the United States has, the analysis found.

In Europe, where workers in many countries were shielded from job losses and plunging income by government furlough programs, the slow pace of the European Union’s vaccination campaign will probably hurt the economy, said Ludovic Subran, chief economist of German insurance giant Allianz.

On Wednesday, France announced its third national lockdown, as infected patients fill its hospitals.

Subran also questioned whether the European Union can distribute stimulus financing fast enough. The money from a 750 billion euro, or $880 billion, relief program agreed to by European governments last July has been slow to reach the businesses and people who need it because of political squabbling, creaky public administration and a court challenge in Germany.

Karen Dynan, a former US Treasury Department chief economist who is now at the Peterson Institute for International Economics, estimated that economic output in Europe would take at least a year longer to return to pre-pandemic levels in Europe than it would in the United States.

“Fiscal policy has differed across countries in ways that are really shaping the experience they have now,” Dynan said.

Poorer and smaller countries, facing severely limited vaccine supplies and fewer resources to support government spending, are likely to struggle to stage an economic turnaround even if the US recovery increases demand for their exports. Countries including Venezuela, Iraq and Namibia have administered only about 1 vaccine dose per 1,000 people, if that, based on New York Times data. In the United States, the rate is more than 400 doses per 1,000 people.

Still, a booming US economy poses some hazard to other nations — and especially emerging markets — as economic fates diverge.

Market-based interest rates in the United States are already climbing, as investors, sensing faster growth and quicker inflation around the corner, decide to sell bonds. That could make financing more expensive around the globe: If investors can earn higher rates on US bonds, they are less likely to invest in foreign debt that offers either lower rates or higher risk.

If the United States lures capital away from the rest of the world, “the rose-colored view that we are helping everyone is very much in doubt,” said Robin Brooks, chief economist at the Institute of International Finance.

Philip Lane, chief economist of the European Central Bank and a member of the policymaking Governing Council, said the strength of the US economy was generally good news for Europe. But, in an interview Monday, he warned that rising market interest rates could be a burden for the eurozone economy.

“We do think it’s net positive for the European economy — positive for GDP, positive for inflation,” Lane said of the economic rebound in the United States. “But that’s based on the assumption that the increase in bond yields is very limited.” He noted that bond yields have so far risen faster than expected.

Trans-Atlantic trade should get help from warmer relations between the United States and the European Union. The Biden administration has already moved to defuse trade tensions with Europe, which the Trump administration treated as an adversary. Biden met online with European leaders last week.

The US stimulus packages “will be part of the water that lifts all boats,” Selina Jackson, senior vice president for global government relations and public policy at consumer products company Procter & Gamble, said during a recent panel discussion organized by the American Chamber of Commerce to the European Union. “We are hoping for a calm slide out of this economic situation.”