Could the United States avoid a recession?
The U.S. economy faces a number of challenges that threaten to trigger a recession in the coming years. These include the covid-19 pandemic, inflation, supply shortages, public debt, trade deficits and political tension. How likely is the country to overcome these obstacles and maintain economic growth?
A recession is defined as two consecutive quarters of contraction in gross domestic product (GDP), which is the value of all goods and services produced in a country. The last time the U.S. entered a recession was in 2020, when GDP contracted 3.5% due to the impact of the pandemic. Since then, the economy has partially recovered, but has not yet reached pre-crisis levels.
According to International Monetary Fund (IMF) forecasts, U.S. GDP will grow by 6% in 2021 and 4.9% in 2022, driven by fiscal and monetary stimulus, mass vaccination and the gradual reopening of activities. However, the IMF also warns that there are downside risks that could slow or reverse this recovery.
One of the main risks is inflation, which is the generalized and sustained increase in prices. Inflation reduces the purchasing power of consumers and businesses, which can affect consumption and investment. In addition, inflation can force the Federal Reserve (Fed), the U.S. central bank, to raise interest rates to contain it, making credit more expensive and debt more difficult to repay.
Inflation in the United States has soared in recent months, reaching 6.2% year-on-year in October, the highest level since 1990. Factors contributing to this increase include shortages of raw materials, components and labor, strong domestic and foreign demand, and inflationary expectations. The Fed has described this phenomenon as transitory and has maintained its expansionary monetary policy, but has announced that it will begin to reduce its monthly bond purchases starting in November.
Another risk to the U.S. economy is the public debt, which is the set of financial obligations that the State has with its creditors. Public debt increases when the government spends more than it takes in, known as the fiscal deficit. Public debt can be beneficial if it is used to finance productive projects or to stimulate the economy in times of crisis, but it can also be detrimental if it exceeds a certain level or if it is not accompanied by structural reforms.
U.S. public debt has grown exponentially in recent years, especially in the wake of the pandemic, which has forced the government to increase public spending to mitigate its social and economic effects. According to the IMF, U.S. public debt will reach 125% of GDP in 2021 and 130% in 2022, an all-time high. This situation raises concerns about the country’s fiscal sustainability and its vulnerability to possible external or internal shocks.
A third risk to the U.S. economy is the trade deficit, which is the difference between the value of imports and the value of exports. A trade deficit implies a net outflow of foreign exchange from the country, which can weaken its currency and its ability to finance its foreign debt. In addition, the trade deficit reflects a lack of competitiveness of the domestic productive sector vis-à-vis foreign countries.
The U.S. trade deficit has widened in recent years, reaching an all-time high of $916 billion in 2020. Some causes of this deterioration are high domestic consumption, the appreciation of the dollar, trade barriers imposed by some countries and the trade war with China. Despite the Trump administration’s attempts to reduce the trade deficit through tariffs and bilateral negotiations, the result has been rather disappointing.
Finally, a fourth risk to the U.S. economy is political tension, which is the degree of conflict or confrontation between different political actors in the country. Political tension can affect institutional stability, governance, confidence of economic agents and international cooperation. In addition, political tension can generate uncertainty and volatility in financial markets and investment decisions.
Political tension in the United States has become more acute in recent years, reflecting a growing ideological, social and cultural polarization between the two main political parties, the Republicans and the Democrats. This division has manifested itself in several episodes, such as the 2020 presidential election, the assault on Capitol Hill, the impeachment of Trump, the management of the pandemic or the approval of the infrastructure plan. These events have raised doubts about the country’s ability to meet its internal and external challenges.
In conclusion, the U.S. economy has the potential to avoid a recession, but it also faces a number of risks that could compromise its growth. To overcome these obstacles, the country needs to adopt measures that favor macroeconomic stability, fiscal sustainability, trade competitiveness and political cohesion. Only then will it be able to maintain its economic leadership and global influence.