Published: 19 January 2022
The US economic recovery has been one the most impressive of the major economies. From a position where there were more than 22m out of work, and a drop of more than 10% in economic output, US output now stands 1.3% above its pre-pandemic level and payrolls are just 4.2m below the February 2020 peak. The US economy grew around 5.7% in 2021 and expectations are for further growth of 3.9% this year.
Some of the growth is due to massive stimulus from the US Treasury over the first four months of 2021. The fiscal authorities agreed to more than $5 trillion of fiscal stimulus over 2020 and 2021. Biden has now bet even bigger with over $4 trillion of spending on adult education, social care, energy transformation and infrastructure.
This goes some way to explaining the spike in US inflation, with the consumer prices index reaching a three-decade high at the end of 2021. The rebound in the US economy could be challenged by high inflation, labour shortages, supply chain disruption and the impact of tax hikes. As the Federal Reserve starts to tighten monetary conditions, the question is how much of an impact this will have on the US recovery.
Whilst the US started strongly on the vaccination front, there has been a rump of vaccine hesitancy which sees the US lower down the list of most vaccinated countries. This has likely contributed to Omicron infections continuing to run much higher than in other countries. This will also be a headwind for the US economy at the start of this year.
President Joe Biden continues to push forward his social and climate spending plan. This will provide a significant stimulus to certain areas of the economy, though it is being financed by higher taxes on wealthy Americans. The Build Back Better proposal would levy a tax surcharge on Americans who earn more than $10 million, invest in more IRS enforcement and raise taxes for some business owners.
Following the withdrawal from Afghanistan, the international efforts of the United States do not get any easier. The Russian build-up of troops close to the eastern border with Ukraine continues to strain US-Russia relations and despite some high-level talks, things have not de-escalated. The AUKUS deal also ruffled a few feathers when announced, both within allies and particularly from China. The US is being pulled in a number of directions with China growing and flexing its muscles in the South China sea.
At home, Joe Biden has come under fire as more than 850,000 Americans have now died from COVID-19. Biden was close to declaring independence from the coronavirus in July, but the delta and Omicron variants led to more infections and more restrictions.
The position of the Federal Reserve is by no means clear. They began the process of tapering the asset purchase programme late last year. Additional purchases will now end around March. Meanwhile, inflation is at multi-decade highs but is expected to drop back quickly over the course of 2022. The economy, having already recouped a lot of lost output will find the going tougher without the stimulus whilst still struggling with supply disruptions and Covid.
The markets are factoring in rate hikes by the Fed of this year, which could be up to 75 basis points over the course of this year, taking the upper limit to 1%. Depending on what happens with inflation and the economy over the course of the year, it could be that this is an overreaction.
Fed Chairman Jerome Powell is something of a dove in sheep’s clothing and may rely on expectations of higher rates doing some of the work. Given his oft-stated position of not wanting to move too soon on rates, and the headwinds that still face the economy, his bark may turn out to be worse than his bite.
The US economy recovered most quickly, though the UK has been following not too far behind in terms of employment, stimulus and recovery. The UK central bank also moved ahead of the US to raise rates, with the Fed tapering their asset purchases intially. Having been up to 1.38 and down to 1.31, we are now towards the top of the range as the UK seems to be coming out of the Omicron wave in better shape. Forecasts continue to reflect the uncertainty on the path of respective economies and central banks for the year ahead.
The US economy recovered most quickly, though the UK has been following not too far behind in terms of employment, stimulus and recovery. The UK central bank also moved ahead of the US to raise rates, with the Fed tapering their asset purchases intially. Having been up to 1.38 and down to 1.31, we are now towards the top of the range as the UK seems to be coming out of the Omicron wave in better shape. Forecasts continue to reflect the uncertainty on the path of respective economies and central banks for the year ahead.
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Recent data shows that the UK economy regained its pre-pandemic size at the end of November. Supply disruptions, falling unemployment and rising inflation will continue to be themes for the year, with the rate hike by the Bank of England unlikely to be the last.
The European Union has had a tough winter so far with Covid restrictions as a result of the Omicron wave. The Economy finished the year strongly with expectations of a positive year, though the ECB may have to take some action on rapidly increasing inflation.
Australia has been trying to return to normal with reduced restrictions and higher vaccine rates. It hasn’t been plain sailing, with current Omicron cases at record levels. The economy has been making up ground, with inflation lower than most major economies.
New Zealand is now among a small number of countries with major travel restrictions in place and relatively low levels of Covid cases. With vaccinations now at high levels, there is a path to normalisation with the central bank raising rates as inflation picks up.
The increase in oil and commodity prices has benefitted the loonie somewhat. With the potential for further rises, we could see
further strength in the first part of the year, with inflation and interest rates likely to head higher.
