The United States is Leading a Global Recovery

While Europe, China, and Japan are facing sluggish growth, the United States is enjoying a robust economic performance. The U.S. economy has overcome the pandemic, high inflation, and two wars, and achieved faster growth in 2023 than in 2022.

Claudia Sahm, a former Fed economist and now a consultant, said the U.S. has emerged with strength and resilience. “We earned this; it wasn’t just a fluke,” she told The Washington Post.

The latest data shows that inflation was on its way toward the Fed’s 2 percent goal.?The Commerce Department also reported that the economy grew by 3.1 percent in the past year, indicating a smooth landing.

Sahm said the government’s fiscal policy, which put money in people’s hands, was more effective than the Fed’s monetary policy, which adjusted interest rates. “We cannot go into the next crisis being, like, ‘Oh, the Fed’s got this.’”

The global economy is growing faster than expected, defying predictions that the fight against inflation would require a painful downturn, according to the International Monetary Fund’s latest forecast. However, it is not a boom, and there are significant divergences between the major economies, especially the United States and China.

The IMF said that global output in 2024 is expected to rise by 3.1 percent for the second consecutive year, slightly better than what the fund’s economists projected in October. The fund is more optimistic than its sister institution, the World Bank, which expects global growth of just 2.4 percent in 2024.

The United States is outperforming Wall Street’s expectations, with markets surging and inflation nearing the Federal Reserve’s 2 percent goal. The U.S. economy is expected to grow this year at an annual rate of 2.5 percent, up from the 1.9 percent that the fund projected three months ago, helped by strong consumption and government spending.

Eswar Prasad, a professor of trade policy at Cornell University and former head of the IMF’s China division, told CNN that the U.S. has strengthened its role as the main engine of global growth, which is all the more impressive as the rest of the world is struggling to sustain decent growth.

“It is amazing to see the U.S. economy soaring ahead while the Chinese economy stutters and slides into deflation. This difference is mainly due to the inherent resilience of the US economy while China continues to be hampered by some short-term and long-term problems,” Prasad said.

China, on the other hand, is facing a slowdown in its debt-driven property sector, which has not been as bad as expected but still poses a risk to its growth and stability. The fund projects growth of 4.6 percent in China this year, up 0.4 percentage points from the previous forecast, but still below its potential.

China’s economy is also suffering from a shrinking labor force, a declining population, and a loss of household and business confidence in the government’s policies.

“The strong performance of the US economy and dropping growth in China together make it less clear that China’s economy will someday overtake that of the US in terms of annual GDP, a proposition that was once considered a near certainty,” Prasad said.

China’s weak economy and unclear growth prospects are no doubt making the Chinese government more keen to ease trade tensions with the U.S. since those tensions are adding to already unclear growth prospects and harming business confidence, Prasad said.

Russia, another rival of the US, is also set to post higher growth than initially expected, despite extensive US and allied sanctions in response to Russia’s invasion of Ukraine. The fund raised its forecast for Russia, saying it will grow this year at an annual 2.6 percent pace.

Amid constant tensions between the U.S. and its adversaries, the fund remains worried that the global economy may split into competing blocs. Nations imposed about 3,200 new limits on trade in 2022 and an additional 3,000 last year, the IMF said. In 2019, by contrast, new trade measures totaled just 1,100.

“Trade measures have soared around the world,” said Pierre-Olivier Gourinchas, the IMF’s chief economist. “And that’s certainly something that has an economic cost that can drag down global growth.”

Gourinchas said that the world seems likely to dodge a feared “hard landing,” but there might be trouble ahead.

He said that the final stage of a soft landing is underway, with inflation falling steadily and growth staying up. But he warned that the speed of expansion remains on the slow side and that the risks of a resurgence of inflation or a financial crisis are still present.?

Strong Consumer Spending Marks Fourth Quarter

“In many ways, we already have a soft landing,” Columbia Business School economics professor Brett House told CNBC. “The Fed has navigated the economy very skillfully with a kind of ’Goldilocks’ scenario.”

Gross domestic product increased at a much higher-than-expected 3.3 percent rate in the fourth quarter, driven by a robust job market and strong consumer spending.

Inflation has been a constant problem since the Covid pandemic when price increases surged to their highest levels since the early 1980s. The Fed reacted with a series of interest rate increases that took its benchmark rate to its highest in more than 22 years.

As of the latest reading, the current annual inflation rate is 3.4 percent, still above the 2 percent goal that the central bank considers a healthy annual rate.

The combination of higher rates and inflation has hurt consumers especially hard. A “no landing” scenario also means more pressure on household budgets and those with variable-rate debt, such as credit cards.

Some experts still haven’t dismissed a recession completely.

“The real danger here is that the Fed eases prematurely, which is exactly what they did in the late 1960s,” Mark Higgins, senior vice president for Index Fund Advisors, told CNBC.

“The risks of allowing inflation to persist still far outweigh the risk of causing a recession,” he said. “Their failure to do this in the late 1960s is one of the major factors that allowed inflation to become entrenched in the 1970s.”

According to Higgins, history suggests there could likely still be a recession before this is over. To that point, 76 percent of economists said they believe the chances of a recession in the next 12 months is 50 percent or less, according to a December survey from the National Association for Business Economics.

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