The US first quarter GDP growth was at 6.40 % as against the expectations of 6.50 %, but a major surge in the economic activity after the pandemic battered the economy. It was Q2 of 2020 which saw the biggest fall in US growth, as it plunged by 31.40%, and it left 22 million Americans unemployed. There has been all-round improvement ever since that time. Consumers account for almost 68 % of the economy, and their spending rose by 10.70 % in the last quarter, compared with a 2.30 % rise in the last quarter. The spends on goods increased 23.60 %, and on services the expenditure increased by 4.60%. All eligible Americans received their stimulus checks and this factor accounts for most of the moneys spent. Americans saved a lot of money as the savings rate increased to 21 % from 13 % in Q4 CY20. The numbers show a rise in government spending too.
What is behind the surge in the economy is the fiscal stimulus packages and the resultant spending. The first fiscal stimulus package was to the tune of US$ 2 trillion of which US$ 1.20 trillion was direct cash payments. The second introduced by Biden is US$ 1.90 trillion. These two packages put together and the direct cash which the eligible public got is quite a large amount of money which has helped aggregate demand to rise over the last few months. What is more ambitious is the new infrastructure plan, which amounts to US$2 trillion. These massive spends are going to take the US economy to a new era of growth and rising demand, employment, and output. The government will collect higher corporate taxes, which is likely to be revised upwards from 21 % to 28% and utilize the same for the projects. There is a clear accent on the demand side as far as counter cyclical policies are concerned, and they are more likely to bear fruits faster. Economic growth is expected to accelerate further, and this is what is getting reflected in the markets too.
The Fed’s policy remains accommodative, and the Fed Chairman has said repeatedly that only with sustainable growth setting in the normalization process would also start. Till that time the Fed would be on hold. The underlying fears of an inflation is still in the background.
China’s economy too is in an expansionary phase. China reported a GDP growth at 18.30% for Q 1 of CY 21. This is the highest rate of growth which China has witnessed since 1993. The growth numbers indicate that China has gone well past the pre-pandemic macro numbers. Chinese exports have also surged very high, the growth rate being 38.70 % in Q1 of CY 21, compared to the same period of the previous year. In fact, exports by China is mainly to the US and Europe. China is Europe’s major trading partner and during the year 2020, China increased its exports to European Union. Some analysts feel that growth and trade having surged so much so fast, the probability of an impending sluggishness cannot be ruled out.
