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Global economy poised to expand faster, buoyed by vaccinations

Karen Dynan (PIIE)



The global economy is poised for a substantial pickup in economic activity for the rest of this year and next year, although different policy responses, rates of vaccination, and underlying factors mean that growth will vary considerably across countries.

The semiannual Global Economic Prospects outlook is brighter than it appeared last fall because of faster-than-expected vaccine development and dissemination as well as more fiscal support than previously anticipated. The world economy is on track to expand 5.6 percent in 2021, compared with the gain of 4.7 percent that had been projected in PIIE’s October 2020 outlook. In 2022, real global output is forecast to rise a further 4.4 percent.

Global outlook at a glance

Of the large advanced economies, the United States will expand the fastest in 2021, owing in part to its aggressive fiscal policy response. Europe is lagging because of a smaller fiscal response and its struggles to contain the virus that have become more acute than in the United States. Japan's decision to bar overseas visitors from the Tokyo Olympics will hinder its economicrecovery, and the United Kingdom will see some continued drag from the Brexit transition. China leads the recovery among large emerging economies, after containing the virus effectively in 2020 and suffering only indirect effects from recessions elsewhere. Brazil is the only major economy that will probably see a decline in 2021, as the sharp resurgence of the virus there has severely strained the healthcare system and is weighing heavily on the economy.

US outlook

In the United States, pandemic-constrained consumption and generous fiscal support have left consumers with ample resources to finance their pent-up demand. As more of the population is vaccinated, consumer spending should pick up sharply in categories involving high social contact, such as travel, restaurant meals, and indoor entertainment. Businesses are also signaling confidence in the US recovery. Orders of new durable goods have risen well above pre-pandemic levels, job postings have jumped in recent weeks, and applications to form new businesses have been running at high levels for a number of months.

US economic activity will surge in coming months and surpass pre-pandemic levels this spring. Real US GDP is forecast to average more than 6 percent higher in 2021 than in 2020. In 2022, it is forecast to rise an additional 3½ percent.


US job growth will be very strong this year, but with payrolls roughly 12 million short of their pre-pandemic trend, the labor market will take time to fully recover. The US unemployment rate has dropped sharply—from a peak of 14.8 percent in April 2020 to the most recent reading of 6.2 percent in February 2021—but that drop greatly overstates the improvement in the jobs picture. Many workers have left the labor force because of pandemic-depressed job prospects, and prime-age labor force participation has shown no improvement since the middle of last year. Looking ahead, the expansion of labor demand will draw workers back into the labor force, beginning slowly this spring and accelerating in the second half of this year and continuing in 2022. The most likely outcome is that the unemployment rate will decline to 5.0 percent by the end of 2021 and 4.4 percent by the end of 2022. These developments should restore much but not all of the strength seen in the US labor market prior to the pandemic. It is worth bearing in mind that job losses have been concentrated among lower-income American families, and many of these families will not enjoy their own economic recovery until the labor market recovery is complete.


Inflation is likely to rise in the United States on a sustained basis, as rapidly expanding aggregate demand outstrips growth in supply. In the baseline forecast, 12-month core personal consumption expenditure (PCE) price inflation will be 2.2 percent by the end of 2022—higher than in any year since the Great Recession. Federal Reserve leaders have consistently stated that they would welcome a pickup of inflation to this rate (at least for a time), making it unlikely that the Fed would begin to raise its policy rate under these circumstances.

The buildup in household financial resources in 2020, along with the sizable amounts of additional fiscal stimulus recently enacted, have spurred a heated debate about the risk of overheating the US economy. The strength of inflationary pressures over the next few years is especially uncertain and difficult to predict given that there is no historical analog to the combination of forces the economy is facing now. The broad distribution of funds from the fiscal stimulus, surveys suggesting that many households plan to save the funds they receive, and limited payback for some forgone services consumption during the pandemic argue for low propensities to spend out of the financial resources that have been and continue to be accumulated—which would contain the increase in aggregate demand. Moreover, one might be reassured by the muted rise in measures of inflation expectations to date. That said, there is a material chance that inflation will pick up to levels that would lead the Federal Reserve to raise its policy rate sooner than it anticipates. A “hard landing”—whereby longer-term interest rates rise, asset prices drop, and the economy falls back into recession—cannot be ruled out.

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