The International Monetary Fund has published its April outlook for the global economy. It has been hailed by most commentators due to the strong upgrade in GDP recovery. The report states that “global growth is projected at 6% in 2021, moderating to 4.4% in 2022. The upward revision reflects additional fiscal support in a few large economies, the anticipated vaccine-powered recovery in the second half of 2021, and continued adaptation of economic activity to subdued mobility”.
However, there are important warning signs that should be considered because headlines have been predominantly euphoric about this optical upgrade.
Why Joe Biden’s $2 Trillion Infrastructure Plan May Fail
President Biden has announced the American Jobs Plan, which is summed up in the headlines as a $2 trillion investment program in infrastructure and green energy plan is expected to boost job creation, strengthen the manufacturing sector, and drive innovation. However, most of it goes to subsidies and current expenditure and comes with the largest tax increase in United States’ history. It has been hailed as a new “New Deal”, and much like its predecessor, it is basically a massive increase in subsidies to non-productive areas of the economy against a series of protectionist and misguided tax hikes to the productive.
For more than ten years, ECB monetary policy has been ultra-expansionary, whether there was crisis, a recovery, economic growth or stabilization. The worst excuse of all that was used to justify endless quantitative easing has been the often-repeated mantra that “there is no inflation.”
Defenders of aggressive monetary policy have always used the same arguments really.
If we looked at most investment bank outlook reports for 2021, one of the main consensus themes was a strong conviction on a rapid and robust eurozone recovery. They were wrong.
This week, Capital Economics joined other analysts and downgraded the eurozone growth, highlighting “We now think that the euro-zone economy will recover more slowly than we previously anticipated, growing by about 3% this year and 4.5% in 2022. Meanwhile, euro-zone government bond yields seem unlikely to fall much further, and with Treasury yields set to increase significantly, we expect the widening yield gap to cause the euro to weaken against the US dollar”.