PIIE Global Economic Prospects: Recovery remains on track despite Delta variant, supply chain issues

October 5, 2021

The Peterson Institute for International Economics (PIIE) today announced its semiannual Global Economic Prospects, downgrading slightly the outlook for economic growth for the United States this year but projecting that the global economic recovery will continue through 2022 despite headwinds from the Delta variant and supply chain problems.

PIIE Senior Fellow Karen Dynan forecasts that the global economy will expand 5.6 percent in 2021 and 4.9 percent in 2022. US GDP is likely to grow 5.7 percent this year, marginally lower than the April projection of 6 percent, and a further 4.6 percent in 2022. Dynan also projects that core inflation will diminish to 2.5 percent by the end of next year.

Dynan, former assistant secretary for economy policy and chief economist at the US Treasury Department, pointed to five key economic factors that are shaping the outlook in the United States:

  • ample household financial resources that will keep consumer demand high,
  • a gradual retreat of supply chain problems and bottlenecks,
  • a slow return of working-age individuals to the labor force,
  • partial offset of waning stimulus by new fiscal measures, and
  • a slightly earlier tightening of monetary policy than what the Federal Reserve currently expects.

After reaching nearly 4 percent at the end of this year, core US personal consumption expenditure (PCE) inflation is expected to subside to 2.5 percent by the end of 2022. The US unemployment rate is on track to decline to 4.8 percent in the fourth quarter of 2021 and end 2022 at 4 percent.

The United States is leading the other large advanced economies in its economic recovery after an early start on vaccination and an aggressive fiscal response to the pandemic. Europe and the United Kingdom are poised for further economic expansion as supply constraints ease, and Japan's economic recovery should be supported by its stepped-up pace of vaccinations and additional fiscal stimulus.

As has been the case since the beginning of the pandemic, growth prospects in China have been the brightest among the large emerging-market economies. India is recovering briskly but has much ground to make up after a considerable decline in economic activity last year. Brazil's economy, while outperforming expectations this year, is likely to see much slower growth next year amid political turbulence related to the upcoming elections.

Europe

PIIE Senior Fellow Jean Pisani-Ferry analyzed what he terms as solid European growth momentum, attributing it to cost-effective cushioning of the pandemic shock, extensive vaccination and testing, a comprehensive fiscal and monetary response, and the European recovery plan. He discussed European labor market disruptions and widespread shortages as ripple effects from the commotion and assessed that risks of a precipitous monetary tightening that would derail the recovery remain limited. The longer-term impact of accelerated technological upheaval and the green transition will also affect economic growth.

China

PIIE Senior Fellow Martin Chorzempa outlined China's wide-ranging regulatory storm and the increase in Communist Party control, especially centered on technology companies. Despite predictions that  the private sector is going to retreat, he argued that some government initiatives may encourage  private innovation, and many Chinese policies are similar to policy proposals related to technology platforms now being considered in the United States and Europe. Yet, other policies have more worrying implications. The government campaign to ratchet up its control of the economy and society is still in its early days, likely to last at least until the next Party Congress in fall 2022. It may well overreach and impede growth, innovation, and entrepreneurship.

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Michele Heller, PIIE communications and media relations manager, [email protected]

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