Not all Covid-19 pandemic recoveries have been the same. Some of the richest economies on the planet have taken diverging paths when it comes to recuperating from the devastating effects of Covid-19. Multiple forces and crises have been weighing over global growth in the last few years, including the lingering aftershocks of the pandemic, wars, geopolitical tensions, high inflation and steep borrowing costs. As per Kavan Choksi Professional Investor, amidst of this, there have been certain bright spots, the US economy being one of them. Gross domestic product in the United States grew at a remarkable 5.2% in the third quarter of 2023, ahead of China, which was considered to be the engine of global growth.
Kavan Choksi Professional Investor briefly marks how the US economy powered ahead of other rich countries
The United States economy grew at its fastest pace in almost two years in the 3rd quarter of 2023. Higher wages from a tight labor market helped accelerate consumer spending, thereby defying dire warnings of a recession that has been lingering since 2022. The country managed to relatively outperform other countries in the year. It powered ahead of Canada, Japan, the United Kingdom, the European Union and other advanced economies. However, it is also important to understand that the economic resilience of the United States does face certain challenges. Interest rates remain high in the country, and are likely to remain so as the Federal Reserve continues its fight against rising inflation. War in Ukraine and the Middle East may also hit the economy, as could the looming likelihood of a US government shutdown next month.
International Monetary Fund predicts the US GDP to expand by 1.5% in 2024. This is essentially more than the growth rates forecast for the UK economy and well ahead of the euro area, which is predicted to grow 1.2%. The differences in energy prices, pandemic-era stimulus as well as the pass-through of higher interest rates are some of the immediate explanations for the disparate fortunes of the most advanced economies of the world. However, there are also many longer-term, structural factors playing into the divergence that provide an upper hand to the United States.
As Kavan Choksi Professional Investor says, even though officials on both sides of the Atlantic turned on the fiscal stimulus taps to cushion their economies from the impact of Covid-19 pandemic, the United States did so on a much bigger scale. Generous government assistance, including moratoriums on debt payments, along with changes in spending habits and a surge in refinancing due to exceptionally low interest rates, contributed to bolstering the finances of Americans. The savings accumulated during the pandemic enabled U.S. consumers to sustain their spending despite increasing prices, thereby mitigating the adverse effects of inflation on consumption, which is a key driver of the U.S. economy.
The impact of the spike in energy prices has also played a role in the gap between the US and euro area economies. Europe, including the United Kingdom, has experienced higher inflation compared to the United States due to its status as a net importer of energy. The economies of both the UK and the euro area were significantly impacted by the substantial increase in natural gas prices that ensued after Russia’s full-scale invasion of Ukraine in February 2022. This surge in energy costs led to record-high bills for households and businesses, contributing to the overall inflationary pressures in the region.
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