As we step into 2024, there’s a global air of optimism surrounding the economy. Inflation is on the decline worldwide, and growth is proving to be more robust than many experts initially thought. Amidst this positive scenario, one country is turning heads with its unexpected strength – the United States.
After the rollercoaster ride of skyrocketing prices in 2021 and 2022, driven by pandemic-related disruptions and geopolitical events like Russia’s invasion of Ukraine, nations are now witnessing a retreat in inflation. What’s remarkable is that this is happening without the feared recessions that were predicted as central banks took measures to control inflation.
Surprisingly, the U.S. economy has been a shining star, catching forecasters like the Federal Reserve and the International Monetary Fund (IMF) off guard. The IMF recently upped its growth forecast for the U.S. from 1.5% to 2.1%, outpacing the more sluggish growth in countries like the United Kingdom, Germany, the euro area, and Japan.
Federal Reserve Chair Jerome H. Powell shared the upbeat sentiment during a news conference, repeatedly referring to the U.S. economy as “good.”
Several factors contribute to the unexpected resilience of the U.S. economy. Notably, fiscal policy plays a role, with the U.S. government maintaining significant spending, surpassing 40% of overall output in response to the pandemic. Ongoing investments in infrastructure and climate initiatives by the Biden administration are further fueling economic activity.
However, it’s not just government spending that explains the U.S. economic strength. Differences in policy design and a touch of luck are also at play. The U.S. took a unique approach in providing relief to workers, paying them to stay at home with one-time checks and expanded unemployment insurance. This approach fostered job mobility and potentially contributed to stronger productivity growth.
Geopolitical proximity is another factor. While Europe grapples with challenges post-Russia’s invasion of Ukraine, the U.S. has been less affected. European businesses, heavily dependent on Russian energy, are facing increased costs, impacting both businesses and households.
Demographics also contribute to the equation, with the U.S. benefitting from a younger population, adding dynamism to its economy.
The reasons behind this divergence in economic performance have implications for economic policy. Central banks, including the Federal Reserve and the European Central Bank, are delicately navigating interest rate adjustments to strike a balance between controlling inflation and sustaining growth. The challenge lies in achieving a smooth landing without triggering premature tightening or prolonged economic hardship.
In essence, the unexpected resilience of the U.S. economy stems from a mix of policy choices, demographic advantages, and a bit of good fortune. As we navigate through 2024, the U.S. stands out on its economic journey, setting itself apart from global counterparts.