Economic growth expected to accelerate in US, China in expansionary phase too

The US’ first-quarter GDP growth for 2021 was at 6.4 percent against the estimated 6.5 percent but signifies a major surge in the economic activity after the pandemic battered the economy.

The second quarter of 2020 saw the biggest fall in US growth, which plunged by 31.4 percent and left 22 million Americans unemployed. There has been all-round improvement ever since.

Consumers account for almost 68 percent of the economy and their spending rose by 10.70 percent in the March quarter compared with a 2.3 percent rise in the previous quarter. The spends on goods increased 23.6 percent and on services the expenditure increased by 4.6 percent. All eligible Americans received their stimulus checks and this factor accounts for most of the money spent.

Americans saved a lot of money, as the savings rate increased to 21 percent from 13 percent in Q4 CY20. The numbers show a rise in government spending too. What is behind the surge in the economy is the fiscal stimulus packages and the resultant spending.

The first fiscal stimulus package was to the tune of $2 trillion of which $1.20 trillion was direct cash payments. The second package introduced by Joe Biden is worth $1.9 trillion. These two packages put together and the direct cash, which the eligible public got, is quite a large amount of money that has helped aggregate demand to rise over the last few months.

What is more ambitious is the new infrastructure plan, which amounts to $2 trillion. These massive spends are going to take the US economy in a new era of growth and rising demand, employment and output. The government will collect higher corporate taxes, which is likely to be revised upwards from 21 percent to 28 percent and utilise it for projects. There is a clear accent on the demand side as far as countercyclical policies are concerned, and they are more likely to bear fruits faster.

Economic growth is expected to accelerate further and this is what is getting reflected in the markets too. The Fed’s policy remains accommodative and Fed Chairman Jerome Powell has repeatedly said the normalisation process would start only after sustainable growth sets in. Till that time, the Fed would be on hold. The underlying fears of inflation are still in the background.

China’s economy, too, is in an expansionary phase. It reported a GDP growth at 18.30 percent for Q1 of CY21. This is the highest rate of growth the country has witnessed since 1993.

The growth numbers indicate that China has gone well past the pre-pandemic macro numbers. Chinese exports have also surged, with a growth rate of 38.7 percent in Q1 of CY 21, compared to the same period of the previous year.

In fact, Chinese exports were mainly to the US and Europe. China is Europe’s major trading partner and in 2020, it increased its exports to the European Union. Some analysts feel that growth and trade having surged so fast that sluggishness is highly probable.

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