The US has made a remarkable recovery from COVID
According to the Institute of International Finances, the U.S. is on the right track, making a remarkable recovery from the COVID19 pandemic.
The report presented by Robin Brooks, Managing Director & Chief Economist, Jonathan Fortun, Economist, Jack Pingle, Senior Program Assistant, adds that the recovery is a reflection of a very aggressive fiscal stimulus.
The recovery of the US from COVID has been much faster than after the 2008 recession, with both consumption and investment above their end-2019 levels in the third quarter of 2021.
“This remarkable accomplishment is due primarily to substantial fiscal stimulus, which dwarfs in size what was done after the Great Recession,” says the report.
In this survey of the global recovery from COVID, Global Macro Views looked at twenty-one advanced economies and another twenty-three EMs.
“The US is the only advanced economy where the levels of real private consumption and gross fixed capital formation exceed pre-pandemic levels. Meanwhile, the Eurozone looks headed for a major investment slump, on par with what is playing out in some EMs, including South Africa, Colombia, Malaysia and the Philippines.
“The COVID recovery is therefore highly uneven, with the investment slump weighing on medium-term growth prospects outside of the US,” it says.
Positive Picture
The United States staged a remarkable recovery from COVID, especially given that the pandemic is far from over. Real private consumption was back to its pre-COVID trend in Q3 2021, a truly remarkable feat that was never accomplished in the wake of the 2008 crisis (Exhibit 1).
The picture is similarly positive for fixed and residential investment, which have both staged remarkable recoveries (Exhibit 2).
“We survey 21 advanced economies and 23 emerging markets for the scale of recovery from COVID. We examine real private consumption and real gross fixed capital formation, comparing seasonally adjusted Q3 2021 levels to end- 2019.”
Exhibit 3 (below) shows this deviation in percent for real private consumption across countries, highlighting that the US stands out relative to its G10 peers and is bested only by a few emerging markets with aggressive stimulus, including Chile, Turkey and Colombia. Indeed, the US stands out vis-à-vis its G10 peers also in terms of gross fixed capital formation (Exhibit 4), where it is again the best performer.
What is especially notable is that the Euro zone seems to have entered a disinvestment cycle, comparable in severity to EMs like South Africa, Colombia, Malaysia and the Philippines. This disinvestment cycle runs the risk of transforming the COVID shock into a medium-term drag on growth.
US clear outperformer
Exhibits 5 and 6 examine real private consumption and gross fixed capital formation across the G10, where the levels of consumption and investment are indexed to 100 in Q4 2019 in order to highlight their evolution in the run-up and in the wake of COVID. The US is a clear outperformer on consumption, with no other country coming close even remotely.
The Euro zone is similar to the rest of the G10, though it is at the weaker end of the spectrum. The disinvestment cycle in the Euro zone becomes apparent in Exhibit 6, which contrasts the Euro zone with the rest of the G10. It is true that the Euro zone saw a more pronounced run-up in investment ahead of COVID, so perhaps part of the weaker picture now simply points to overinvestment before the pandemic.
“We are not inclined to believe this explanation, however, and see a mounting risk that the Eurozone may be entering a prolonged investment slump, which could extrapolate the COVID shock to weaker medium-term growth,” says the report.
