US vaccine and fiscal policy puts economy on strong footing, IMF says

The Washington-based lender raised its 2021 US growth projection to 7 per cent

A worker walks past carts of packages ready for delivery drivers to pickup at a Veho Tech facility in Atlanta, Georgia. The impact of Covid-19 on the US economy has been severe, with unemployment rising to 14.7% in April 2020, the highest rate since the Great Depression. Bloomberg
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The US economy is "on a strong footing" because of an effective vaccine rollout and substantial fiscal support by Washington, according to the International Monetary Fund.

"Unprecedented fiscal support is quickly restoring the economy back to full employment and generating positive outward spillovers to the world economy," the IMF said in an Article IV consultation report.

The world's largest economy is now forecast to grow 7 per cent this year after shrinking 3.5 per cent last year, according to the fund. The IMF's latest growth forecast for 2021 marks the fastest growth pace the US has seen since 1984 and compares with a previous projection of 4.6 per cent growth for this year. The lender also raised its 2022 US growth forecast to 4.9 per cent, up from a previous 3.5 per cent forecast.

Unemployment is projected to fall to 5.5 per cent this year from 8.1 per cent in 2020. Unemployment rose to 14.7 per cent in April 2020, when the pandemic severely curtailed economic activity. That was the highest rate in the US since the Great Depression.

Still, while the fund commended the US for its multi-pronged measures, it also said it is concerned about mounting public debt.

"These efforts have not been costless: the path for public debt is far higher; the current account deficit has grown, and very accommodative financial conditions have led to increased corporate and nonbank leverage and rising valuations across a range of assets," the IMF said.

General government gross debt is projected to rise to about 134 per cent of gross domestic product this year after jumping to nearly 133.8 per cent in 2020 as Washington reacted to the pandemic and tried to cushion the impact of the crisis on the economy. The debt-to-GDP ratio was 108.1 per cent in 2019 before the onset of the pandemic.

The Biden administration has pushed for aggressive vaccination and more accommodative stimulus packages, which helped lower the unemployment rate. Mr Biden also pushed through a $1.9 trillion coronavirus relief package to help the US economy and Americans recover from the debilitating impact of the pandemic.

The US has recorded more than 35 million infections, the most globally. It also takes the lead in the number of deaths, with 626,658 having lost their lives to coronavirus, as of Saturday, according to Worldometers, which tracks the pandemic.

The Washington-based lender urged the US government to "prioritise spending toward programs that have the biggest impact on productivity, labour force participation, reducing poverty, and facilitating a shift to a low-carbon economy."

IMF directors welcomed proposals to help offset the cost of these spending plans by increasing taxes on companies and high-income households, closing tax loopholes and redefining the international corporate tax system, while increasing resources for the country's Internal Revenue Service.

Fund directors said better targeting of policies can help strengthen their impact on macroeconomic and distributional outcomes, help trigger a bigger boost to aggregate supply, and lessen the risk of a sustained rise in inflation.

Inflation is now expected to rise to 4.8 per cent this year from about 1.2 per cent in 2020, according to the fund.

Updated: July 24, 2021, 6:15 AM