The World Ahead 2022
America’s economy will claw its way back to the pre-covid trend
But a strengthening economy may not help Joe Biden
AT FIRST GLANCE, America’s headline growth figures for 2021 seem to be a stunning achievement. Its GDP is on track to expand by nearly 6% after shrinking by 3.5% in 2020, its sharpest trough-to-peak rebound in more than half a century. Yet the details are more troubling. Inflation has jumped, companies are struggling to find willing workers and everything from nappies to cars has been in short supply. The coming year will flip things around: the headline figures will be less impressive, but under the bonnet America’s economic engine will be healthier.
After 2021’s big rebound, growth in 2022 will almost certainly be slower. Most analysts forecast an expansion of roughly 4%. And momentum will steadily ebb as the months roll on, simply because the year-on-year comparisons will be progressively less flattering. That should not, however, diminish the broader achievement. Growth of 4% would still be robust by the standards of the past few decades. Amazingly, the overall size of the American economy would then end the year almost exactly as large as was predicted in 2019.
In the early months of 2022 much of the focus will be on the Federal Reserve. Given the strong economic backdrop, the central bank will bring an end to its ultra-loose monetary policies launched at the height of the pandemic. Jerome Powell, the Fed’s chairman, has indicated that tapering—the gradual halt of its monthly purchase of bonds and other assets—will begin in late 2021 and be complete by mid-2022. That will be a headwind for financial markets. But the Fed’s extensive telegraphing of its plans has given investors plenty of time to price them in.
The focus will then shift to when the Fed might start to raise interest rates. A slight majority of its rate-setting committee thinks that modest tightening will be necessary before the end of 2022. Any such moves will of course depend on the state of the economy, with inflation a particular concern. The Fed has staked much on the idea that the price pressures of recent months are transitory, and are mainly a reflection of the world’s strained supply chains. Many analysts agree, expecting inflation to decelerate towards 3% in 2022 as the global economy continues to open up. As, with luck, covid-19 fades, into the background, more Americans will also re-enter the job market, bringing the economy a step closer to normality. If, however, inflation proves to be more persistent, the Fed will face calls to raise rates more swiftly.
Will Mr Powell be at the helm of the Fed for all these decisions? His term expires on February 5th and President Joe Biden is expected to reappoint him for a second term well before that deadline. The progressive wing of the Democratic Party wants someone who is tougher on banks, but Mr Powell oversaw a forceful monetary response to the pandemic slowdown and deserves a second crack at the job.
For fiscal policy, 2022 will be an important pivot for America. With the expiration of the giant covid-relief packages of the past two years, the federal deficit will shrink from 13% of GDP to 5%. Normally, that would constitute a sudden fiscal tightening. But households have more than $2trn in excess savings, thanks in part to the stimulus cheques they received. So consumption should remain solid.
Crucially, 2022 will be the first year in which Mr Biden’s “Build Back Better” spending hits the economy. His programme has two legs: a renewal of America’s neglected physical infrastructure and a recrafting of its social safety-net, including more funding for families with children. The total invested will be smaller than Mr Biden and most Democrats had first hoped for. But such are the realities of finessing legislation through Congress.
Even so, it will be refreshing to see that the American government is still capable of pulling together funding for long-term priorities. The prospects of any more ambitious initiatives in the coming years will vanish if the Democrats lose control of the Senate and, possibly, the House of Representatives in mid-term elections in November. Mr Biden will be left to rue the irony of his sagging political fortunes even as he presides over a strengthening economy.
Simon Rabinovitch: US economics editor, The Economist, Washington DC■
This article appeared in the United States section of the print edition of The World Ahead 2022 under the headline “Rebound, the sequel”