Soft landing is global, but it's cushiest in America

Economists say that America's outperformance has come from a combination of luck and judgment.

Washington: The world is starting 2024 on an optimistic economic note, as inflation fades globally, and growth remains more resilient than many forecasters had expected. Yet one country stands out for its surprising strength: the United States.

After a sharp pop in prices rocked the world in 2021 and 2022 - fueled by supply chain breakdowns tied to the pandemic, then oil and food price spikes related to Russia's invasion of Ukraine - many nations are now watching inflation recede.

And that is happening without the painful recessions that many economists had expected as central banks raised interest rates to bring inflation under control.

But the details differ from place to place. Forecasters from the US Federal Reserve to the International Monetary Fund have been most surprised at the remarkable strength of the US economy, while growth in places such as Britain and Germany remains more lackluster. The question is why America has pulled out ahead of other developed economies in the pack.

The IMF said last week that it expected the US economy to grow 2.1 per cent, a sharp upgrade from the previous estimate of 1.5 per cent.

Other major advanced economies are also expected to grow, albeit less quickly. The euro area is expected to notch out 0.9 per cent growth, as is Japan, and Britain is forecast to expand by 0.6 per cent.

"This is a good situation, let's be honest, this is a good economy," Jerome Powell, the Fed chair, said at a news conference last week - two of nearly 20 times that he called the data "good" during his remarks.

Evidence of that strength continued Friday, when a blockbuster jobs report showed that US employers had added 3,53,000 jobs in January and wages grew at a rapid clip.

America's outperformance has come from a combination of luck and judgment, economists said. Below is a rundown of some of the factors behind the comparatively strong performance - starting with those that reflect policy choices and moving to factors that owe more to fortune.

One reason for US resilience: Fiscal policy

Part of the reason that economic growth has been so surprisingly strong in the United States is simple: The federal government has continued to spend a lot of money.

Government expenditures as a share of overall output hovered around 35 per cent in America in the years leading to the pandemic, based on IMF data.

But in 2020 and 2021, they jumped above 40 per cent as the government responded to the coronavirus with about $5 trillion in relief and stimulus to people, businesses, institutions, and state and local governments.

States and households have only slowly spent down the savings they amassed during those pandemic years, so the money has continued to trickle through the economy like a slow-release booster shot.

On top of that, government spending has remained elevated as the Biden administration has begun to make sweeping infrastructure and climate investments.

"As the economy recovered, the US just poured more kerosene onto the fire," said Kristin Forbes, an economist at the MIT Sloan School of Management and a former Bank of England official.

Forbes noted that the U.S. deficit as a share of its gross domestic product is larger than that in many other advanced economies, and today's spending is adding to the American debt pile. Given that, strong growth today could come at a cost - including higher interest bills - down the road.

Administration officials have suggested it was worth the trade-off. Lael Brainard, who heads President Joe Biden's National Economic Council, told reporters last month that the combined outlays had allowed families to "weather this really disruptive period of time and bounce back".

Yet government spending doesn't fully explain the divergence between the United States and other economies. Other countries also spent a lot in response to the pandemic, and places like the euro area and Britain are still spending more than they did before the pandemic in recent years, as a share of output.

Jan Hatzius, Chief Economist at Goldman Sachs, said that he believed that the GDP data - which can be volatile and gets revised - could be overstating the divergence between US growth and those in other countries.

But to the extent that there is a gap, he does not think government spending has been a big driver of the stronger US performance over the past year.

Instead, a number of economists said, what is happening could owe partly to policy design differences - and luck.

Pandemic layoff responses were not created equal

America took a different approach than its European peers when it came to how it designed policy relief for workers displaced by pandemic shutdowns: It paid workers to stay at home, with one-time checks and expanded unemployment insurance, whereas countries in Europe paid workers to stay in jobs.

The resulting churn as Americans have sorted themselves into new and better jobs could be leading to the stronger productivity growth that the United States is seeing now, said Adam Posen, President of the Peterson Institute for International Economics, a think tank in Washington.

"Ahead of time, it was not clear which was going to be the better way to go," Posen said, noting that many economists had worried that the U.S. approach would actually perform slightly worse. "As always, it is better to be lucky than to be good."

Proximity to geopolitical problems is also important

Other advanced economies have also fallen victim to misfortune. European countries have been much more exposed to the aftershocks from Russia's invasion of Ukraine in 2022, a conflict that has pushed up gas and grocery prices - roiling the business environment and limiting households' abilities to afford other discretionary products.

While the United States imported relatively little oil and gas from Russia, that was not the case for Europe. According to a 2023 survey by the European Investment Bank, 68 per cent of European Union businesses saw their energy prices increase by 25 per cent or more, compared with 30% of US businesses experiencing the same increase.

Speaking to the US Chamber of Commerce Tuesday morning, Valdis Dombrovskis, the European commissioner for trade, said that Europe had been working to address its dependence on Russian fossil fuel, but that cutting those ties "came at a cost".

Kristalina Georgieva, the managing director of the IMF, told reporters Thursday that the resilience of the U.S. economy stemmed from several factors -- including insulation from volatility in global energy markets.

"There have been good economic forces and winds blowing into US sails," Georgieva said.

Now, tensions in the Red Sea that are disrupting shipping routes there could have bigger spillover effects for Europe. This has started to push up shipping prices and delay deliveries, particularly for goods traveling to Europe from Asia.

Biden administration officials are monitoring those disruptions, but they are less concerned since they are "a little bit less salient for American supply chains than for other parts of the world," Brainard said.

Demographics play a role

When it comes to the absolute level of growth in the United States versus advanced economies like the euro area and Japan, America also has the benefit of a younger population. The median age in the United States is about 38.5, whereas it is 46.7 in Germany and 49.5 in Japan.

Youth helps to make an economy more dynamic: Younger adults work more, and families who are having children, buying houses and building lives spend more than retirees.

All of this could matter to policy

Whatever is causing the divergence, it could matter for economic policy.

The Fed, the European Central Bank and the Bank of England are all nudging toward cutting interest rates as they try to avoid undermining growth. Central bankers don't want to lower rates too early and fail to fully stamp out inflation. They also want to avoid keeping them too high for too long, inflicting more pain than is necessary to wrestle price increases under control.

For the ECB and the Bank of England, slower growth could make that an especially delicate process; policy errors could tip those economies from slight growth to slight contraction. But completing the soft landing is a looming challenge for many central banks.

"At this time of the cycle, there is risk of premature loosening, but there is also risk of keeping interest rates higher for longer," Georgieva said. "They now need to land the plane smoothly."