JAKARTA (TheInsiderStories) – IHS Markit downwardly revises 2021 United States (US) GDP forecast as COVID-19 stimulus unlikely to be implemented this year GDP to surpass pre-pandemic peak in early 2022. The GDP grew at a record 33.1 percent rate in the third quarter (3Q), close to the agency final tracking estimate of 33.8 percent.
“However, we expect GDP growth to fade after the third quarter, as catch-up spending wanes, federal and state & local fiscal support dissipates, and rising COVID-19 infection rates leave states cautious about re-opening their economies and encourage continued caution by consumers and business independent of official containment measures,” said Joel Prakken, chief economist from IHS Markit, in the latest report.
He also project the GDP to surpass its previous peak in early 2022, and the economy to regain full employment in early 2024.
He added, “With negotiations likely on hold until after the inauguration of President-elect Biden, we’ve removed previously assumed fiscal stimulus from the forecast pending clarification of the dimensions and timing of another pandemic relief bill. The removal of stimulus subtracted roughly 0.5 percentage point from our forecast of GDP growth in 2021, which is revised down from 3.7% to 3.1 percent.”
In detail, the personal consumer expenditure (PCE) grew 40.7 percent as spending on goods and services rebounded sharply from 2Q troughs. Fixed investment grew 28.5 percent as surges in spending on equipment and residential construction overwhelmed declines in spending on non-residential structures and intellectual property products.
Imports grew 91.1 percent, much faster than exports (59.7 percent) and net exports subtracted 3.1 percentage points from GDP growth. Federal spending fell 6.2 percent as payments made in 2Q for processing PPP loans waned. State and local spending declined 3.3 percent as sales to other sectors (for hospital and educational services) surged. Inventory investment added 6.6 percentage points to GDP growth as auto production rebounded sharply.
Despite record 3Q growth, the level of GDP remains 3.5 percent below the previous peak and roughly 5 percent below our pre-pandemic estimate of potential output. Furthermore, monthly growth has slowed since May, setting up a deceleration in 4Q growth to 3.7 percent and bringing 2020 growth to -3.6 percent, revised down 0.1 percentage point from last month’s forecast.
“With slower near-term growth, GDP surpasses its previous peak in the first quarter of 2022, and the economy regains full employment in early 2024, both slightly later than in last month’s forecast,” said the report.
Then, rebounding energy prices and a weakening dollar will push inflation to 2.5 percent through 2021. However, with slack labor markets and firms competing for reduced business, inflation, measured by the rate of change in the “core” PCE price index, will average close to 2 percent through 2025.
Recent communications from the Fed suggest it will encourage inflation temporarily above 2 percent to re-enforce the Federal Reserve’ 2 percent average inflation objective. Accordingly, the forecast assumes the Fed maintains the federal funds rate near zero until late 2026, with the unemployment rate falling modestly below the full-employment rate and inflation slightly above 2 percent over the years 2026 – 2030.
“IHS Markit expects GDP growth to fade after the third quarter, as catch-up spending wanes, federal and state & local fiscal support dissipates, and rising COVID-19 infection rates leave states cautious about re-opening their economies and encourage continued caution by consumers and business independent of official containment measures. We project GDP to surpass its previous peak in early 2022, and the economy to regain full employment in early 2024,” noted by Prakken.
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