Mar 12, 2021
Since the global financial crisis in 2009, spectators have often commented on the fact that monetary policy is the only winning operation in sight. For almost a decade now, central bankers have sought out unconventional ways to stimulate the economy while governments focused on repairing their own balance sheets. Though this is soon to come to an end, now that President Joe Biden has signed a $1.9tn economic relief bill in response to COVID-19. The effects are likely to ripple across the globe, impacting more than just America.
The OECD’s Forecast
The Organisation for Economic Co-operation and Development (OECD) forecasts that global income will rise by 1% this year. This is based on an analysis of Biden’s government spending programme and takes into account the rapid rollout of vaccinations. The OECD estimates that the global economy will expand 5.6% this year after falling drastically due to the coronavirus pandemic. This is higher than the original 4.2% forecast in December.
A thriving US economy offers advantages to the rest of the globe, too. Neighbouring countries such as Mexico and Canada are likely to benefit, considering their trading partnerships. Not to mention East Asia and Europe, which are export-orientated economies. There will also be major gains for advanced economies that borrow in their own currencies. Rapid economic growth in the US will increase potential exports while encouraging traders to invest due to optimistic market sentiment.
Inflation & Interest Rates
Conversely, potential issues may arise with the newfound demand for goods and services. This, in turn, could cause inflation and trigger higher interest rates. Investors are anticipating that the Federal Reserve will either be forced to increase rates to stave off the pressure of inflation or, alternatively, remove the relief bill as the economy begins to return to its pre-COVID state. Members of the European Central Bank’s board have raised concerns of a potential escalation in financing costs. This will have a knock-on effect that minimises the value of their own relief bill efforts, particularly in areas where monetary policy remains the largest form of stimulus.
The Rest of the Globe
Fragile economies that relied on the capital flows that strengthened the dollar will be impacted by rising rates, especially if the US’ recovery is derived from other richer countries. Poorer countries are likely to struggle to borrow in their own currencies, therefore making it harder for them to adjust.
Countries more exposed than others are still in a better position today than during the ‘Taper Tantrum’. This occurred in 2013 and involved the Federal Reserve announcing that it would be
reducing the pace of its purchases of Treasury bonds so as to lessen the amount of money being fed into the economy. As a result, many countries invested time into building up reserves that would protect them against similar outflows, thereby reducing their reliance on external, dollar-orientated finance.
Also affected by the US and Chinese stimulus effort is commodity prices. An inevitable rise will work in the favour of exporters but only cause trouble for importers.
Should the OECD be correct in its forecast regarding the Biden relief bill, it is likely that, overall, strengthening the US economy will assist in forging a global recovery. As the world’s largest economy, a knock-on effect is to be expected.