The International Monetary Fund (IMF) raised its 2021 US growth projection to 7 per cent as the government continues to support the economy and coronavirus cases reduce on the back of vaccination programme.
The IMF's latest forecast marks the fastest growth pace that the US has seen since 1984 and compares with an April projection of 4.6 per cent growth in 2021. The lender also raised its 2022 US GDP growth forecast to 4.9 per cent, up from its previous 3.5 per cent April forecast.
“The unprecedented fiscal and monetary support, combined with the receding Covid-19 case numbers, should provide a substantial boost to activity in the coming months,” the IMF said in a report on Thursday. “Savings will be drawn down, demand will return for in-person services, and depleted inventories will be rebuilt.”
The forecasts, however, are based upon an assumption that the American Jobs Plan and American Families Plan will be legislated during the course of 2021 “with a size and composition that is similar to that proposed by the administration”, according to the lender.
The American Families plan sets aside $1 trillion to invest in families and education, while also providing $800 billion in tax cuts in an effort to promote economic prosperity and security.
The American Jobs Plan includes $2tn spending by the government to rebuild the nation's crumbling infrastructure, including roads, bridges and airports, as well as other developments.
“The Jobs and Families Plans are expected to produce a lasting improvement in income and living standards for many years to come,” IMF managing director Kristalina Georgieva said. “They will add to near-term demand, raising GDP by a cumulative 5.25 per cent over 2022 to 2024.”
The country is also pressing ahead with its vaccination programme. As of Friday, the US had administered 328 million doses, covering 51.3 per cent of the total population, according to Bloomberg's vaccine tracker.
“We have seen large consumer price movements in recent months, and we think that those fairly high inflation readings will continue for a few months. However, I want to emphasise that the evidence suggests that this inflation will be transitory and is largely a product of relative price movements that are occurring as the economy rebounds from the impact of the pandemic, sometimes in a rather uneven way,” Ms Georgieva said.
The IMF estimates core inflation – excluding volatile food and energy prices – could get close to 4 per cent by the end of the year and to 2.5 per cent by end-2022.
President Joe Biden’s administration’s new impetus to reduce greenhouse gases represents a critical, and very positive, change of direction, according to the lender.
“Proposed spending on green infrastructure and efforts to remove fossil fuels subsidies are valuable steps forward. And more will have to follow,” the IMF said.