US economy to rebound 4.6% in 2021, complicating stimulus talks

The United States economy will grow 4.6 percent in 2021 after contracting 3.5 percent in 2020, the Congressional Budget Office (CBO) said on Monday, releasing a rosier forecast that could strengthen Republican resistance to President Joe Biden’s proposed $1.9 trillion COVID-19 aid plan.

The new forecasts, based on United States laws and policies enacted law through January 12 — about a week before Biden took office — predict that growth will taper off after 2021 to below 2 percent by 2031.

But these forecasts are significantly stronger than the CBO’s previous economic forecasts issued in July, which predicted a 4 percent real-growth rebound in gross domestic product (GDP) in 2021 after a 5.8 percent contraction in 2020.

“CBO currently projects a stronger economy than it did in July 2020, in large part because the downturn was not as severe as expected and because the first stage of the recovery took place sooner and was stronger than expected,” the CBO said.

The latest forecasts include the effects of a $900bn coronavirus stimulus package passed at the end of 2020 and a faster resumption of business activity. It said the 2020 stimulus plan would increase the US budget deficit by $774bn in fiscal 2021, which ends September 30, and by $98bn in fiscal 2022.

The economic forecasts will be used in an update of CBO budget projections for 2021-2031, which will be released later in February and set a baseline for measuring the fiscal costs of Biden’s spending proposals.

Biden was due to meet with 10 moderate Republican senators later on Monday to discuss their desire for a smaller stimulus, even as Democrats prepare to move forward without Republican support.

The CBO said it expected the average US unemployment rate to fall to 5.7 percent in 2021 from 8.1 percent in 2020 — a major improvement from July forecasts of 8.4 percent in 2021 and 10.6 percent in 2020. But it said the number of people employed would not recover to pre-pandemic levels until 2024.

“Over the course of the coming year, vaccination is expected to greatly reduce the number of new cases of COVID-19, the disease caused by the coronavirus. As a result, the extent of social distancing is expected to decline,” the CBO said in its economic forecast report.

After this year, the CBO said it expected US real gross domestic product growth to slow to 2.9 percent in 2022 and 2.2 percent in 2023 — a pace similar to the relatively strong growth years of 2018 and 2019, respectively.

Real GDP will average 2.3 percent for 2024 and 2025 and 1.7 percent for the 2026-2031 period, according to the CBO forecasts.

But it said inflation, as measured by the consumer price index excluding food and energy costs, will rise from 1.6 percent in 2021 to 2.1 percent in 2022, and average 2.4 percent for the years 2024-2031, well above the Federal Reserve’s nominal 2 percent inflation target.

This could raise concerns that a further massive stimulus, along with Biden’s plans for major infrastructure investments could run the economy too “hot” and stoke inflation.