Is this just a spring thing? A year into COVID-19, we’re used to bad news coming in wave after wave. Suddenly, the news has brightened and there’s hope that we may be getting to the other side of the pandemic. That’s in spite of continued European lockdowns and the Miami Beach spring break fracas. So, is renewed optimism just wishful thinking, or is there more to it?
Economics is known as the dismal science for good reason. Upbeat news is generally regarded with suspicion, as some sort of smarmy sales pitch that couldn’t possibly be real. So, when economists all agree on a positive story, well, it’s probably worth looking into.
Positive it is! In one month, the forecasts assembled by Consensus Economics Inc. have taken a mighty leap. It centres around the United States economy, where in a mere 30 days, the average forecast has jumped by a full percentage point, from an already-high 4.7% to 5.7%. And there seems to be a growing consensus that this isn’t enough, that the U.S. economy is going to actually tip the scales at more than 6%.
Official forecasters agree, and have upped their calls radically. The U.S. Federal Reserve Board (Fed) recast its forecast from 4.2% in December 2020, to 6.5%. Also, in December, the Organisation for Economic Co-operation and Development (OECD) released a prediction that the U.S. would grow this year by just 3.6%. In an interim report released earlier this month, the number has ballooned to 6.5%.
Outsized adjustments like this are rare, but when they do happen, they need explaining. This one’s simple: the now-approved $1.9 trillion U.S. stimulus plan. Prior to it passing through the legislative process, forecasters were typically reluctant to feed it into their outlooks. With passage, everyone sharpened their pencils, and made the adjustments.
This one’s a whopper, and payday is in a matter of weeks. About 40% of the plan is expected to hit in the second quarter, when $750 billion in government transfer payments are made. From this point, the increments aren’t as enormous, but still significant, and are planned to carry on through the second quarter of 2022.
The consumer is the major driver of the growth surge, with the forecast up 1.1% to 6.3% for the year. There’s a wide variety of opinion on whether consumers will come through. Some are still calling for sub-5% growth, while others are more than 8%. Why the wedge? On the high side, consumers have a private cash stash accumulated during COVID-19 that they could add to the stimulus, pushing things over the top.
Others feel that until consumers are totally comfortable that COVID-19’s effects are largely behind us, they’ll be in no hurry to part with their cash, private or stimulus. Some are also concerned that U.S. consumers are already calculating what post-pandemic tax bills are going to be, given the rise in public debt. These savvy mathematicians are unlikely to change their spending patterns, choosing instead to save for tax time.
Clearly, these benefits will spill across the rest of the U.S. economy. Average forecasts for business investment, profits and industrial production are all up as well. Given the heft of the stimulus program, the 2022 forecast has also been boosted.
Benefits won’t be confined to the U.S., according to the average view. In the same month, the 2021 forecast for Japan is up 0.5%. The United Kingdom also seems to be cashing in, although recent economic figures may play a part in the 0.4% upward revision to this year’s outlook. Interestingly, the forecast for continental Europe is static. It’s no surprise that Canada gets the biggest pop, up 0.9 percentage points to 5.5%. Clearly the forecasting community believes that in spite of Buy American policies, the benefits are expected to spill into the global economy.
It’s hard to overemphasize the magnitude of this revision, and for the most part, it’s the most positive news the world has had since the pandemic’s inception. However, it has raised concerns that inflation may get a bit out of hand, although forecasters seem confident that the Fed can handle it. Inflation forecasts are slightly above target, but weren’t adjusted materially in the latest round. Mind you, financial markets seem less convinced.
