(CNN Business) –– President Joe Biden’s US $ 1.9 trillion stimulus package will strengthen the United States economy and drive faster global growth this year, the International Monetary Fund (IMF) said on Tuesday. However, the agency warned that many countries continue to suffer from the pandemic and are at risk of being left behind.
The US economy will exceed its size before the pandemic as growth will reach 6.4% this year, the IMF said. A figure that is 1.3 percentage points above the forecast made by the group last January. The rebound will help the global economy expand 6% in 2021. This is also a 0.5 percentage point improvement over the IMF’s previous outlook. Furthermore, the estimates are in line with Wall Street’s expectations.
“At US $ 1.9 trillion, the Biden administration’s new fiscal package is expected to generate a strong boost to growth in the United States in 2021 and provide significant positive spillovers to trading partners,” the IMF explained in a report. Other governments and central banks around the world have also injected trillions of dollars into the global economy.
US recovery picks up speed
The IMF noted that the “unprecedented political response” to the pandemic means that “the recession is likely to leave smaller scars than the 2008 global financial crisis.” The group estimates that world production fell 3.3% in 2020, while the US economy contracted 3.5%.
In fact, there are already signs that the recovery in the US economy is picking up speed. Employers in the country added 916,000 jobs in March, the largest increase since August. The US manufacturing sector is also making headway, and the ISM index, which focuses on this specific area, recently released its best reading since 1983.
The IMF expects coronavirus vaccination and massive government stimulus to combine this year to produce America’s fastest annual growth rate since 1984, when Ronald Reagan was president. But, many other countries will have to wait until 2022 or 2023 to regain all the production they lost during the pandemic. Global production growth will slow to 4.4% next year, according to the IMF.
“Recoveries are occurring at various speeds in all regions and across income groups, related to marked differences in the pace of vaccine distribution, the degree of support for economic policy, and structural factors such as dependence on tourism.” explained Gita Gopinath, IMF research director. “Different recovery trajectories are likely to create significantly wider gaps in living standards between developing countries and others.”
The United States is not the only one that will see its economy grow
The updated US forecast means that the world’s largest economy is on track to grow faster this year than many other developed nations. The IMF expects growth of 4.4% in the 19 countries that use the euro. Precisely, while Europe is fighting another wave of coronavirus that has forced Germany, France and Italy to tighten restrictions. Production is expected to expand 3.3% in Japan.
But some countries in Asia will overtake the United States. The IMF expects China, the only major economy to avoid recession last year, to grow 8.4% in 2021. A figure much stronger than the country’s official forecast of more than 6%. Production in India will expand by 12.5% in the fiscal year to March 2022.
The IMF attributed the strongest growth projections to continued government stimulus and vaccine distribution. However, he noted that consumer prices could be volatile. Although he does not expect high levels of inflation to take hold due to weak wage growth and unemployment.
Still, the IMF warned that “a high degree of uncertainty surrounds” its projections. This reflects the wide range of possible developments that the coronavirus has. “More progress in vaccines can raise the prognosis. While the new variants of the virus that evade vaccines can lead to a sharp decline, “explained the group in their report.
During the 2008 global financial crisis, advanced economies were hit harder than developing nations. However, the IMF expects the opposite to happen in the pandemic. The group also said that young people, women, and lower-skilled workers are more likely to lose their jobs due to the coronavirus.
“Once the health crisis is over, political efforts can focus more on building resilient, inclusive and greener economies. Both to drive recovery and to increase potential production, “Gopinath said.
While the stimulus has helped protect the economy and the financial system, it has also encouraged investors to take excessive risks and raised asset prices, the IMF warned in a separate report. If interest rates rise sharply in response to inflation, that could lead to tighter financial conditions.
The consequences would affect developing markets and poorer countries to a greater extent.
“There is a risk that financial conditions in emerging market economies will tighten significantly. Especially if the authorities of advanced economies take steps towards normalization of policies, ”said the IMF.