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America’s stimulus-led economy driving global demand. Who’s holding the battalion next?

America’s stimulus-led economy

The economic recovery for the world has been a catching-up race for some countries to the finish line while some have left others far behind the line. The stimulus-led economic growth in the United States presents one such economy, looking to pass its battalion to other economies to drive the global economy back to its original track, just like China did to the United States back in 2020. It is because what the country is experiencing right now is what economists call fiscal leakage. Let’s get into the detail of the what and why of the situation. 

US household wealth hits record even as economy struggles - The Financial  Express

Trade deficit in the US? That’s new.

The initial stages of 2021 were not very different from those of 2020, the people of the country could not avail themselves of any significant services. They couldn’t attend/ throw weddings, go to events, participate in games- so what did they do with the stimulus money provided to them? Well, they consumed goods. This is reflected in the USD 57 Billion year-on-year jumps in imports of consumer goods in the country. As for the case of the United States, the shift from services to goods is a shift from domestic consumption to the global economy.

This means that the stimulus dollars are flowing out of the country, further creating a trade deficit for the country. This is the resultant of the trade deficit occurred in the month of April, of $68.9. This level, however, came down from USD 75 billion in March, but was still significantly higher than the usual numbers, around the levels of USD 45 billion per month immediately before the pandemic. This is essentially anomalous for a country like the United States that usually enjoys a trade surplus owing to the last export of services. However, one of the major contributors to the above-mentioned services is the country’s tourism income, which has been much vividly hit because of the pandemic, unsurprisingly.

America and Russia - The Statesman

What does this fiscal leakage imply? 

Now, what does this outflow of dollars mean for the rest of the world? And what would happen once they’re played out? A major portion of this answer is contingent on other economies’ response pace, not only in terms of economic recovery but also the inoculation drive, which, however, has been a significant contributor to the revival of the US economy. With the excessive imports aided by the heavy stimulus checks, the United States economy is propelling demand for the global economy. 

One way this can go is that if the rest of the world, or say a few border countries that are enjoying this export spree, capitalize on this spur of global demand and join the party of economic revival, a valve for inflationary pressure already being felt in a lot of markets, including American ones, would be created.

Economists claimed that this fiscal leakage would prove useful if it helps aid the inflationary pressure being experienced in American borders and is reciprocated by the global economy, especially when these dollars have played out, to generate demand for US exports. However, as can be inferred directly from the statement mentioned above, it is a tricky dice US economy is trying to roll in its favor. 

So much mess. Tell me a way out already!

The savior in all these circumstances is not economic revival but an effective, global vaccination drive that would help get economies back on the ideal track, in terms of pent-up supply and demand both for goods and services like tourism and others. So, eventually, the entire outlook of the economy of the United States is dependent on the ability of other economies to act as drivers of economic growth for the global economy. Remember passing the battalion, looks like it would be required to be done, quite literally. 

However, brace yourself for another twist here. If the pace of global recovery is as quick as the path United States led on, the inflation situation would get worse. It means that we don’t want the resurgence to be too quick and too strong.

As economists describe it, if the majority would be stimulating simultaneously to their respective peaks, the world would witness greater congestion. So, a more promising and healthy alternative lies in economies catching up as drivers one after the other. Think of it simply based on the International Monetary Fund’s world economic outlook report that estimated growth prospects of the countries for the coming year, in which the United States’ 2021 GDP was forecast to be 3% above its 2019 level, while China was forecast to be 11% above its 2019 level.

But the euro area and Japan were each on track to have economies 2% smaller than in 2019, with Britain, Canada, Brazil, and Mexico also forecast to be in negative territory. Thus, as the US dollar stimulus fades out, Europe could hold the driver seat in the global recovery followed by developing nations, leading to what is known as phased recovery, as economists suggest. One big advantage of this would be the fact that it won’t put too much supply pressure on the economy, and growth would stimulate growth for others. 

But what is important to note here is that this vision is achievable only if a robust vaccination place at a global level comes in place. Lousy and inefficient inoculation drives in a large number of world economies have been one of the prominent reasons for this inflationary pressure, essentially because the supply countered by global production has been unable to meet the stimulated demand, causing the price push. Not only that, but global recovery also needs to come at the back of the vaccination drive, irrespective of it being phased or a continuum, because only then would the supply gap look like an achievable feat.

A recent report published by the IMF showed that if the worldwide vaccination rate of 40 percent is achieved, a tantamount of ISD 9 trillion would be injected into the economy, a major proportion of which would go to the advanced nations like the United States and Europe. This means that even individual recovery would come only if the world economies move together to the finish line, an important lesson for the leading world economies.

Simerleen Kaur
Simerleen Kaur
Talk to me about economics, trade, and all things India.
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