Home/ News / World/  US growth surge could unbalance fragile global economy

The U.S. will drive a sharp rebound in the world economy this year, but the strength of the American bounce could unbalance weaker economies, particularly in the developing world.

According to the Organization for Economic Cooperation and Development, the rise in U.S. government bond yields in response to higher growth and inflation expectations could spark capital flight from emerging economies, where vaccine campaigns have barely begun and whose economic recovery is expected to take longer.

The Paris-based research body now expects the world economy to reach pre-pandemic levels of output by the middle of this year, six months earlier than it expected when it last published updated forecasts, in November. It now sees global output increasing by 5.6% in 2021, having declined by 3.4% in 2020. In November, it forecast global growth for this year of 4.2%.

The main reason for the upgrade is a stronger outlook for the U.S. economy, which it now sees expanding by 6.5%, more than twice the pace it forecast in November and the fastest expansion since 1984.

OECD Chief Economist Laurence Boone said that reflects an expectation that fiscal stimulus will be delivered, as vaccinations help free the economy of its Covid-19 fetters. The Senate approved Sunday a $1.9 trillion coronavirus relief bill, paving the way for passage through the House as early as Tuesday.

“Fiscal policy has been hugely supportive, but you also need to push the accelerator on vaccinations, because if not, the additional stimulus will go on saving rather and not consumption," Ms. Boone said.

The OECD now predicts the U.S. economy will be larger at the end of 2022 than it had expected before the pandemic struck. Among other Group of 20 leading economies, only Turkey is seen being in a similar position. India is expected to see the largest shortfall, with gross domestic product more than 8% down on where it was expected to be before the coronavirus began to spread.

The OECD said the slow pace of vaccination in Europe reduces the need for further stimulus for now, because a partially closed economy would be unable to meet any extra demand. And in many other parts of the world economy, neither rapid vaccination nor fiscal stimulus are available.

The research body said there was a risk that global growth becomes more unbalanced, leading to potentially disruptive flows of capital to high-growth countries from low-growth ones.

U.S. Treasury yields jumped Monday after the Senate’s weekend vote following a run-up in recent weeks. If sustained, that rise could increase borrowing costs for the government and businesses.

Ms. Boone said the rise in U.S. yields was understandable and not a concern because it reflected an improved growth outlook. She said rising borrowing costs in other parts of the world would be more of a problem because they would not reflect stronger growth prospects and could hold back economic recovery.

In particular, the OECD said investors could move capital into the U.S. and away from emerging-market countries, pushing down the value of their currencies and weakening economies that are straining to recover from the pandemic.

The best way to avoid that threat is to speed up vaccination programs in other parts of the world, Ms. Boone said.

“The wider the divergences across countries regarding vaccinations, the wider the differential in the pace of growth, and that paves the way for capital outflows," she said.

The OECD made much more modest changes to its forecasts for other large economies than for the U.S. It now expects the eurozone to grow by 3.9% this year, up from the 3.6% forecast in November, while it expects China’s economy to expand by 7.8%, having previously predicted 8%.

This story has been published from a wire agency feed without modifications to the text.

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