PIIE Global Economic Prospects: Global economy poised to expand faster, buoyed by vaccinations

April 1, 2021

WASHINGTON—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. Global growth is on track to expand 5.6 percent in 2021, with US GDP to surge by more than 6 percent this year and an additional 3.5 percent in 2022. Core US inflation is projected at 2.2 percent by the end of 2022, while unemployment will decline to 5.0 percent by year-end and 4.4 percent by the end of 2022.

These and other assessments are being presented today at the Peterson Institute for International Economics (PIIE) semiannual Global Economic Prospects event by PIIE senior fellow Karen Dynan and PIIE president Adam S. Posen.

All told, Dynan, former chief economist at the US Treasury Department, in her presentation expects that 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 economic recovery, 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.

In his presentation, Posen discusses the monetary regime shift represented by the Federal Reserve's new strategic framework and its implications for the inflation outlook and monetary policy. He finds the Fed's shift to emphasizing observable broad labor market outcomes instead of forecasts of unobservable forecast variables as triggers for policy credible and significant. Headline CPI inflation in 2021–22 will nonetheless significantly exceed current Fed and market forecasts, Posen argues, likely averaging 3.25 percent or higher over the next 18 months. The Fed will likely be able to hold off raising its instrument interest rate through the end of calendar year 2022, despite Posen's forecast of volatile long-term Treasury interest rates around a rising trend. Absent further non-interest rate measures to assure financial stability and a de facto disregard of movements in market-based inflation expectations as he recommends, however, the Fed will likely begin raising rates in early 2023. Given the inertia of actual inflation in the economy, and the importance of temporary factors in causing the inflation likely to occur, Posen believes the Fed will only have to raise rates a limited amount (on the order of 100 basis points) in order to re-establish price stability.

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About PIIE

The Peterson Institute for International Economics is a private, nonprofit institution for rigorous, intellectually open study and discussion of international economic policy. Its purpose is to identify and analyze important issues to make globalization beneficial and sustainable for the people of the United States and the world, and then to develop and communicate practical new approaches for dealing with them. The Institute is widely viewed as nonpartisan. Its work is funded by a diverse group of philanthropic foundations, private corporations, and interested individuals, as well as income on its capital fund. Visit https://piie.com/sites/default/files/supporters.pdf to view a list of all financial supporters.

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