A representative image of the American flag painted next to a street sign reading “Wall Street” in New York City. — AFP/File
New York: The US is the MVP of GDP. That was the verdict of the International Monetary Fund at its spring meetings last week. America's star turn is much needed, as key members of global growth teams such as Europe and China are falling behind. But the company's performance has been supported by worryingly high debt and temporary increases in productivity and workforce growth. In the long run, even this exceptional athlete can become short of breath.
As central bankers and finance ministers arrive for the biannual event hosted by the IMF and World Bank, Washington's famous cherry trees have already begun to shed their flowers. That was an apt metaphor. War, trade tensions, and high interest rates have sapped the global economy.
Indeed, the IMF predicts that global GDP will expand by 3.2 percent both this year and next. This is the same pace he will be in 2023. However, this is lower than the global economy's annual average of 3.8 percent from 2000 to 2019. The IMF expects growth to be just 3.1% by 2029, the lowest rate in decades.
Without the United States, the outcome might have been even worse. The world's largest economy grew by 2.5% last year, with only Spain among developed countries matching this pace, with the IMF predicting it will grow by 2.7% in 2024. This is more than three times faster than in the euro area.
China, another reliable contributor to global GDP these days, is also dragging its feet. The IMF estimates that growth will slow from 5.2% last year to 4.6% in 2024 and 4.1% in 2025. “One growth engine is better than none,” points out a half-glass policymaker in the IMF's cavernous headquarters. But what happens if that engine sputters?
A closer look at the demographic statistics of the US economy suggests that there is a risk of fatigue. The coronavirus tragedy has prompted the federal government to launch a massive new economic stimulus package worth about 27% of GDP in 2020-21, according to the Tax Foundation. It worked: The Hutchins Center at Brookings calculates that fiscal support boosted GDP growth by nearly 14 percent in the second quarter of 2020 alone, opens in a new tab. And that left households with $2.1 trillion in excess savings above pre-pandemic trends, opening a new tab at the San Francisco Fed, the report said.
But the pandemic weighed on Uncle Sam's balance sheet. The U.S. budget deficit rose from 5.8% of GDP in 2019 to nearly 14% in 2020 and more than 11% in 2021. And the government continues to spend.
The IMF estimates that the budget deficit will average nearly 6.5% of domestic output each year until 2029, almost double the 2015 level. American consumers also continue to splurge. The IMF estimates that spending last year was 2.2% higher than in 2022, exceeding the average growth rate of 1.7% between 2006 and 2015. In the euro area, private consumption spending expanded by only 0.5% last year.
The vitality of American consumers is critical to economic performance, as consumption accounts for nearly 70% of U.S. GDP. However, it may be flagged. Excess savings have declined and new doors have reached $30 billion while consumers max out their credit cards.
At the end of last year, 9.7% of card balances were outstanding for 90 days, the highest level since early 2021, opens a new tab on New York Fed data. Home sales fell 4.3% in March as rising mortgage rates scared off buyers.
Low unemployment, moderate wage growth, and strong stock market investment gains may keep the U.S. spending expansion going for some time, but the IMF expects private consumption spending growth to fall to 1.6% by 2025. ing.
The staying power of the U.S. economy surprised the IMF and other forecasters. This is partly due to two factors that can prove difficult to model and difficult to maintain. The first is the rapid increase in immigration. In November, the Congressional Budget Office increased its estimate of net immigration to the United States from 1 million to 3.3 million. —News Desk
