The massive jobs shortage will keep stronger inflation temporary, Goldman Sachs says

Job fair coronavirus
People seeking employment speak to recruiters at the 25th annual Central Florida Employment Council Job Fair at the Central Florida Fairgrounds.

  • Stronger inflation will soon fade as millions of Americans rush back to work, Goldman Sachs said.
  • Labor supply will rebound as virus fears fade and enhanced unemployment benefits lapse, the bank said.
  • Ending the labor shortage should cool wage inflation, and price inflation will also likely be temporary, Goldman added.
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When it comes to the inflation debate looming over the US economy, Goldman Sachs is on the side of the Federal Reserve and the Biden administration.

Gauges of nationwide price growth are surging at their fastest rate in more than a decade, sparking concerns of an overheating economy ending the recovery early. Republicans and some moderate Democrats have blamed the Fed’s ultra-easy policy stance and unprecedented fiscal stimulus for the inflation overshoot. The Biden administration and the central bank have instead argued the stronger price growth is temporary and fade starting next year.

Goldman economists led by Jan Hatzius reiterated their stance on the Biden side on Monday, citing the latest jobs numbers as supporting evidence. The US added 559,000 nonfarm payrolls in May, missing the median estimate but still a sharp rebound from the dismal April report. Wages shot higher for a second straight month, signaling inflation was picking up in pay and pricing.

The combination of soaring wages and stronger inflation amplified Republicans’ claims of an overheating economy. Yet both pressures should cool in the coming months, Goldman said. For one, the economy is still down roughly 8 million payrolls, and May’s pace of job creation still places a full recovery more than a year into the future. Labor supply, which has been slowing hiring in recent months, should also “increase dramatically” as virus fears dim and enhanced unemployment insurance lapses. As more Americans return to work, wage growth is expected to slow.

Inflation should also cool on the pricing side, according to the bank. Goldman’s trimmed core Personal Consumption Expenditures (PCE) index – which excludes the 30% largest month-over-month price changes – has only risen 1.6% from the year-ago level. By comparison, standard PCE – among the most popular US inflation gauges – notched a 3.6% year-over-year gain in April. Core PCE strips out volatile food and energy prices and is generally viewed as a more reliable measure of long-term inflation.

The disparity reveals the “unprecedented role of outliers” in driving inflation higher, and such an effect should “have only limited effects on longer-term inflation expectations,” the economists said in a note to clients.

“Ultimately, the biggest question in the overheating debate remains whether US output and employment will rise sharply above potential in the next few years,” the team added. “If the answer is yes, then inflation could indeed climb to undesirable levels on a more permanent basis. But our answer continues to be no.”

The forecasts echo sentiments shared recently by central bank officials. Fed Governor Lael Brainard said last week that, as schools reopen and vaccinations continue, it’s likely that the labor shortage will unravel. Job openings sat at record highs by the end of March, and a matching of such huge demand with bolstered supply should drive “further progress on employment,” she added.

More broadly, Goldman expects GDP growth to slow after peaking in the second quarter and normalize as stimulus support lapses. The massive jobs shortfall makes for “significant slack” in the labor market, the bank said, adding that unemployment-based output should reach its maximum potential in late 2023.

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One stunning chart shows just how much faster the US labor market is recovering now compared to the financial crisis

Now Hiring man with mask
  • A full labor-market recovery is more than a year away, but the rebound is still fast by historical standards.
  • The pandemic saw unprecedented job loss, but payrolls are bouncing back faster than in past downturns.
  • The US is on track to recoup all lost jobs in two years. The same feat took more than six years after the Great Recession.
  • See more stories on Insider’s business page.

The US labor market is far from a full rebound. Compared to the last recession, however, the recovery is moving at a breakneck pace.

The economy added 559,000 nonfarm payrolls in May, data out Friday showed. The reading marked a fifth consecutive month of job additions and a strong uptick from the disappointing gains seen in April. The US unemployment rate also hit a pandemic low of 5.8% and major stock indices neared record highs on the encouraging news.

Still, payroll growth hasn’t enjoyed the kind of V-shaped bounce-back staged elsewhere in the economy. At May’s pace of job creation, it would still take until July 2022 for the economy to recoup every job lost during the pandemic. It would take about another year from then to recapture jobs that would’ve been made had the pandemic not occurred. The projections also don’t take the nationwide labor shortage into account, which could further drag on job additions.

Calculated Risk recession chart
Source: Calculated Risk

Comparing the pandemic recovery to the Great Recession and other downturns tells an entirely different story. In a Friday post, economics blogger Bill McBride of Calculated Risk contrasted job creation from recent months to that seen during post-World War II recessions.

The trend is clear: despite seeing far more severe job losses at the start of the recession, the labor market’s recovery is the most V-shaped in modern history.

A few factors explain the pronounced rebound. The government’s response throughout the pandemic was unprecedented. Congress approved roughly $5 trillion in fiscal stimulus, and the Federal Reserve eased monetary conditions through historically low rates, massive asset-purchase programs, and extraordinary lending programs. Combined, the efforts helped economic activity bounce back relatively soon after the pandemic first hit.

The nature of the recession also played a role. The economic crisis was simply a symptom of a once-in-a-century pandemic. Lockdown measures used to curb the virus’s spread were a top reason for weaker activity. Once those restrictions were lifted, Americans with pent-up demand and bolstered savings got out and revived the economy.

The current downturn also doesn’t possess the same structural problems faced in the late 2000s. The Great Recession was fueled by a collapse of integral financial systems. Long-trusted institutions were suddenly behind an economic collapse, and the government was forced to step in with then-unheard-of support. Distrust in said institutions and severe damage throughout the housing market led to a painful and plodding recovery.

The COVID-19 crisis, by comparison, was simple. A deadly virus was spreading throughout the country, so authorities forced lockdowns that caused great harm to the economy.

The US has also learned from the Great Recession and the recovery that followed. An early push for fiscal austerity and inadequate aid for state and local governments hindered the labor market’s healing for years after the financial crisis. Payrolls didn’t return to their pre-recession highs until more than six years after the initial drop, longer than any previous postwar recession.

Policymakers are trying something else this time around. The $1.9 trillion stimulus measure approved in March included $350 billion for state, city, and local governments to offset budget shortfalls. On the monetary front, the Fed’s newly updated goals signal it will maintain ultra-easy monetary conditions well after the pandemic threat fades.

“Now is not the time to be talking about an exit,” Fed Chair Jerome Powell said in January. “I think that is another lesson of the global financial crisis, ‘be careful not to exit too early.'”

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The Chamber of Commerce just sounded the alarm on America’s labor crisis – and it’s blaming a lack of qualified workers for a historically stark shortfall

Now Hiring sign
A customer walks by a now hiring sign at a BevMo store on April 02, 2021 in Larkspur, California.

  • A shortage of qualified workers is hindering the labor market’s recovery, the Chamber of Commerce said.
  • Sectoral shifts in worker demand drove a gap between Americans’ skillsets and job openings.
  • Training programs, childcare support, and an expansion of work visas can counter the mismatch, the Chamber said.
  • See more stories on Insider’s business page.

The US economy hasn’t faced a labor shortage quite like this one.

By several measures, the economy is on the mend. Consumer spending has bounced back, more than half of Americans are fully vaccinated, and the strictest lockdown measures have been reversed. But as businesses look to rehire after months of slowed activity, they’re finding it hard to fill openings.

The labor shortage now represents “the most critical and widespread challenge” to US businesses, the US Chamber of Commerce said in a Tuesday report. Only 1.4 available workers exist for each US job opening, according to government data. That’s just half the 20-year average, and the ratio is still falling. In sectors hit hardest by the virus, such as education and government, job openings fully exceed available workers.

Worker availability ratio
Source: US Chamber of Commerce

Economists and politicians have pegged the shortfall to a number of factors, ranging from virus fears to enhanced unemployment insurance. The right-leaning Chamber on Tuesday highlighted the country’s massive skills gap as fueling the shortage.

“We must arm workers with the skills they need, we must remove barriers that are keeping too many Americans on the sidelines, and we must recruit the very best from around the world to help fill high-demand jobs,” Chamber CEO and President Suzanne Clark said.

The organization announced a new initiative on Tuesday aimed at addressing the shortage of qualified workers and difficulties in developing skills. The Chamber is calling for a doubling of the cap on employment visas, federal investment in job-training programs, and an expansion of childcare access for working parents.

A separate survey by The Conference Board echoed the Chamber’s remarks. About 80% of organizations hiring industry and manual service workers said it was either “somewhat difficult” or “very difficult” to find qualified employees, up from 74% before the health crisis. The share of firms saying it’s “very difficult” to find workers grew to 25% from 4%.

The Chamber’s call to action comes as the country forms a wholly new economy. Experts have warned that the post-pandemic economy won’t mirror that seen in late 2019. Millions of Americans will struggle to find work as their jobs are permanently erased, Federal Reserve Chair Jerome Powell said in April. Meanwhile, openings will shift to other industries as the country settles into a new normal.

The mismatch between displaced workers’ skills and new job openings is among the biggest challenges facing the US labor market, economists at Fitch Ratings said last week. The rapid change in worker demand by sector “can lead to lasting increases in unemployment” if Americans aren’t able to quickly pivot, the team said in a note.

Underscoring the mismatch is the decision by GOP governors in 25 states to prematurely end participation in federal unemployment benefits. Those governors have cited increased benefits as a reason that workers are opting not to come back, causing a labor squeeze. But workers say that’s not the full story.

Dina Jones, 54, lives in Texas. Her state’s governor, Greg Abbott, announced that Texas will pull out of all federal benefits effective June 26. Prior to the pandemic, Jones had worked in the airline industry for 27 years.

“I made a really good living, and to go out and take a $12, $15 job is – I’m very skilled,” Jones told Insider. She said she used to manage over 100 employees. She added: “I just don’t understand what’s happening out here in the world that I can’t get a job.”

Early signals suggest low-wage workers will have a harder time pivoting than most. A February report from McKinsey found that low-wage sectors – those hit disproportionately hard by the pandemic – will see permanently weaker labor demand as the country recovers. More than half of the workers displaced from such industries will need to develop new skills and find higher-paying jobs to stay employed after the pandemic ends, the firm said.

“Almost all growth in labor demand will occur in high-wage jobs,” the report added.

As for Jones, who will lose all of her unemployment benefits come June, it stings to hear her governor say that there are plenty of jobs out there.

“The jobs that are out there aren’t the jobs that I used to have, that I’m skilled for, she said. “And that’s the part that hurts.”

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Global growth will hit a 5-decade high in 2021 on vaccine-powered rebound, OECD says in upgraded forecast

Japan shopping street coronavirus
  • The OECD lifted its 2021 global GDP estimate to 5.8% from 4.2%, forecasting the fastest growth since 1973.
  • Group of 20 countries will see even stronger growth and emerging countries will lag, the organization said.
  • Central banks need to look through temporary inflation and keep policy support in place, the OECD added.
  • See more stories on Insider’s business page.

Economic recoveries are improving around the world, but the global rebound remains massively uneven, the Organization for Economic Co-operation and Development said in a new report.

The OECD revised its estimate for global gross domestic product higher on Monday, citing unprecedented policy support and the effectiveness of COVID-19 vaccines. Output is now expected to grow 5.8% in 2021, up from the December 2020 forecast of a 4.2% expansion. That rate would mark the strongest year of economic growth since 1973 and follow last year’s 3.5% contraction, the OECD said.

Global GDP will then grow 4.4% in 2022, according to the report. Global income will still sit roughly $3 trillion below its pre-crisis trend by the end of next year as emerging countries struggle to keep up.

“The global economy remains below its pre-pandemic growth path and in too many OECD countries living standards by the end of 2022 will not be back to the level expected before the pandemic,” Laurence Boone, chief economist at OECD, said.

Living conditions aren’t the only disparity expected to widen through the recovery. Real GDP is expected to grow 6.3% and 4.7% among G20 nations in 2021 and 2022, respectively. That outpaces the average growth estimate.

Meanwhile, some emerging-market economies are expected to post substandard growth in the near term. Countries still enduring deadly waves of COVID-19 such as India and Brazil “may continue to have large shortfalls in GDP relative to pre-pandemic expectations” and only bounce back once the virus threat fades, the organization said.

Improving vaccine distribution is key to supporting such countries, especially as virus uncertainties linger. New variants of COVID-19 could necessitate a return to partial lockdowns if populations aren’t vaccinated quickly enough, the organization warned. Such a resurgence could also drag consumer confidence lower and halt any rebound in spending.

Upside risks have emerged as well. Household saving boomed through the pandemic, and that cash could soon be unleashed as people unwind pent-up demand. Spending just a fraction of the bolstered savings “would raise GDP growth significantly,” the OECD said.

But with spending comes inflation. Supply-chain disruptions and bottlenecks around the world have driven material prices higher in recent months. When coupled with a sharp bounce in demand and various stages of reopening, price growth now sits at its highest levels in more than a decade. The OECD expects inflation to average 2.7% in 2021 before cooling to 2.4% next year.

Central banks should allow for a brief inflation overshoot as production normalizes and temporary pressures ease, Boone wrote. Running economies hot can allow for stronger hiring and wage growth, particularly among low-income groups. Central banks must “remain vigilant” and look through temporary inflation, the economist said.

“What is of most concern, in our view, is the risk that financial markets fail to look through temporary price increases and relative price adjustments, pushing market interest rates and volatility higher,” Boone added.

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Biden sees a post-pandemic economic boom, but a small and short one

Biden
President Joe Biden.

  • Biden’s budget sees the economy booming for just two years before settling into slower growth.
  • GDP is forecasted to grow 1.8% annually in the mid-2020s, weaker than growth after past recessions.
  • The conservative estimates contrast with the Trump administration’s pattern of underdelivering.
  • See more stories on Insider’s business page.

The Biden administration sees a strong economic rebound in the cards. What’s forecasted afterward is less exciting.

President Joe Biden revealed his budget proposal for the 2022 fiscal year on Friday, laying out his plan to spend roughly $6 trillion on child care, clean-energy initiatives, and infrastructure improvements – and laying out a set of forecasts for US gross domestic product over the next several years.

The near-term estimates are promising. Biden sees GDP expanding 5.2% in 2021 and 3.2% in 2022, handily exceeding the annual growth seen just before the COVID-19 crisis.

But if the so-called Biden boom began with his $1.9 trillion stimulus plan in March, then his budget proposal sees it ending just two years later. The administration estimates GDP growth will slow to 2% in 2023 and then settle at 1.8% through 2027.

This is considerably weaker than recoveries from previous recessions. Annual growth averaged 2.3% from 2010 to 2019 as the US placed the Great Financial Crisis behind it. After the dot-com bubble burst in 2001, GDP grew at an average annual rate of 5.4% until 2008. And the output expanded at an annual pace of 4.4% from 1983 to 1989, after back-to-back recessions had kickstarted the decade.

Biden’s forecast, then, is notably conservative. It contrasts with statements he’s made publicly as recently as this week. Citing “independent experts” in a Thursday speech, the president said growth could come in at 6% or greater in 2021.

He added that his follow-up spending proposals would open the door to “faster” growth. Yet the rate of expansion forecasted in his budget sees growth slowing or holding steady through 2027.

It also falls short of forecasts from major Wall Street banks. Morgan Stanley sees growth coming in at 8% this year before cooling to 3.2% in 2022. Bank of America projects growth of 7% in 2021 and 5.5% the following year.

The modest estimates could reflect a desire to buck the trend seen throughout the Trump presidency, which underdelivered on growth, even before considering the economic collapse seen through 2020.

The Trump administration’s final budget expected GDP growth to trend at 2.9% through 2030. While that was published before the pandemic, it still handily exceed the levels forecasted by Biden.

To be sure, other estimates in Biden’s plan are much more optimistic. The White House expects the unemployment rate to fall from 6.1% to 5.5% by the end of 2021 and reach 4.1% by the end of 2022. The rate will then hold steady at 3.8% into 2031, just above the pre-pandemic lows of 3.5%, according to the plan.

Biden’s latest spending proposals – which include trillions of dollars for infrastructure and family support – are also engineered to provide sustained investment instead of an immediate burst like that seen with his stimulus plan. Both packages are meant to be spent over the next eight to 10 years, and administration officials argue such a timeline would minimize their effect on inflation.

The White House has also stepped up its calls to invest in economic growth while interest rates sit at historic lows. While deficits are traditionally measured as debt to GDP, interest-payments to GDP are a better measure for sustainable spending, Treasury Secretary Janet Yellen told lawmakers in a Thursday hearing.

The government should spend on investments that lift output over the long term while debt-financing costs are so low, she added.

“The president’s proposal will have a temporary period of spending and permanent increases that, beyond the budget window, will result in lower deficits and more tax revenue to support those expenditures,” Yellen told a House Appropriations subcommittee.

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4 reasons it will take more than a year for the US to get back to full employment, according to Fitch

Job fair coronavirus
A man seeking employment speaks to a recruiter at the 25th annual Central Florida Employment Council Job Fair at the Central Florida Fairgrounds

  • The US won’t return to full employment until the fourth quarter of 2022, Fitch Ratings said Wednesday.
  • Matching workers’ skills with new jobs will take time, as will a rebound in workforce participation.
  • Some workers – particularly older Americans – are likely permanently discouraged from work, Fitch added.
  • See more stories on Insider’s business page.

The good news: The US labor market is well on its way to a full recovery.

The bad news: It’s going to take a while to get there.

After improving steadily through 2021, the disappointing April jobs report signaled the labor market’s rebound wouldn’t be as smooth as most hoped. With labor shortages and supply bottlenecks now dragging on the broader recovery, economists are updating their employment projections to account for numerous new hurdles.

Fitch Ratings economists joined the crowd on Wednesday. The team led by Brian Coulton sees a return to full employment arriving in the fourth quarter of 2022, about 15 months from today. The unemployment rate will fall to 4.3% from the April reading of 6.1%, and the employment-to-population ratio will return to a steady state, the team added.

Filling the hole in the labor market requires creating 7 million jobs, but a handful hurdles stand in the way of such an achievement, according to the team.

(1) The dangers of long-term unemployment

Bringing Americans back into the workforce is crucial to bringing about a full recovery, and those who’ve been out of it the longest present a significant challenge.

Almost 30% of unemployed Americans have been out of the labor force for more than a year, and that share is growing, Fitch said in a note to clients.

Bouts of unemployment lasting more than a year are far more likely to turn into permanent detachment from the workforce. Bringing the country to full employment will hinge on bringing the long-term unemployment rate from its latest reading of 1.8% closer to its pre-pandemic norm of 0.5%, the team said.

(2) Matching workers’ skills with the right job

Various economists and officials have warned that, while the economy will fully rebound, it won’t look the same as it did in early 2020.

Some jobs will be permanently erased, and others will crop up elsewhere as the post-pandemic economy takes form. Those structural shifts in where labor is in demand will force some unemployed Americans to either move or change their skillsets entirely.

“Rapid changes in the sectoral demand for labor can lead to lasting increases in unemployment if workers made unemployed in shrinking industries are unable to move into other sectors,” the economists said.

(3) Some participation won’t return until well after reopening

The labor force participation rate took on new relevance during the pandemic as millions of Americans who lost their jobs didn’t look for new roles and dropped out of the workforce entirely.

The rate sank from 63.4% in January 2020 to a pandemic low of 60.2% in April of last year. Yet after $5 trillion in stimulus, vaccine distribution, and progress toward a full reopening, labor force participation stood at 61.7% last month.

“While we believe a large share of the fall will be reversed as the economy opens up there is also a likelihood that some people have permanently left the workforce,” Fitch said. Such a dynamic would persistently drag on the labor market until more Americans join the workforce.

(4) Many older workers are out for good

The participation rate for Americans aged 55 and older shows a particularly concerning trend.

The rate dove to 38.4% at the peak of the pandemic’s onset and sat even lower, at 38.3%, last month. That contrasts sharply from rates for other age groups, which have retraced at least half of their pandemic-era declines.

The trend is also unlikely to be linked to early retirement, Fitch said. The number of retirees rose by 1.24 million in 2020, according to social security data. That’s less than the 1.37 million jump seen the year prior.

If the trend continues throughout reopening, it “could signal permanent discouragement from the labor force among older workers,” the team said.

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Shortage bottlenecks are showing up in the lack of hiring, JPMorgan says

toilet paper disinfecting wipes sold out grocery stores
Shelves with toilet paper and disinfecting wipes are nearly empty at a Pavilions supermarket in South Pasadena on March 11, 2020 in Los Angeles, California.

  • April’s dismal job growth is similar to the commodity shortages plaguing US businesses, JPMorgan said.
  • Average wages swung higher in April as firms raised pay to attract workers.
  • That increase is “consistent with constraints” in hiring and mirrors rising prices for key materials, the bank said.
  • See more stories on Insider’s business page.

Commodity shortages and hiring woes are more similar than they first appear, according to JPMorgan economists.

A handful of obstacles stand in the way of what is otherwise a promising US economic recovery. Supply-chain disruptions and a slew of factory backlogs gummed up the country’s manufacturing sector as demand strongly rebounded in April. Prices for everything from lumber and gasoline to toilet paper and palm oil have shot higher as a result.

Businesses’ need for workers similarly rebounded as firms look to service outsize consumer demand, but the US added only 266,000 jobs in April, a sharp deceleration from the job growth seen in March and a big miss of the 1 million-payroll estimate. Yet average hourly earnings surged through the month and the average workweek grew longer as businesses converted part-time employees to full-time work.

These developments are “consistent with constraints” in the labor market, rather than a lack of demand for workers, JPMorgan said.

“We had anticipated bottleneck pressures this year, but signs of similar constraints in US labor markets is a surprise,” the team led by Bruce Kasman said in a note to clients.

Economic data published Tuesday morning supports such claims. The country ended March with a record 8.1 million job openings, according to the monthly Job Openings and Labor Turnover Survey. The hiring rate climbed slightly, and about 1.2 Americans competed for every job opening. Although April JOLTS won’t be released for another month, the March figures suggest businesses were ramping up hiring efforts as the economy continued to reopen.

The rising commodity prices also point to another pressure plaguing the labor market. Experts including Federal Reserve Chair Jerome Powell suggested before the report that a jump in average wages would be indicative of a worker shortage. If wages need to climb to accelerate hiring, the combination of higher labor and materials costs could further boost inflation and create new economic worries.

JPMorgan, for now, sees such bottlenecks fading as the recovery charges on. Sustained policy support and strong economic growth should drive more Americans into the workforce. This should, in turn, alleviate some manufacturing pressures and help producers address their massive order backlogs.

The bank isn’t alone in its optimism. The expiration of bolstered unemployment benefits and the start of the school year will push more Americans to job openings, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said Sunday.

The creation of new businesses can also offset permanent job losses. While April job data was hugely disappointing, it still seems as though the labor market will emerge without the long-term scarring many feared, Nobel prize-winning economist Paul Krugman said Wednesday.

“People seem to be eager to go back to work. Not enough to make companies that don’t want to pay higher wages happy. But this whole thing is really looking like a V-shape recovery,” he told Insider.

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54 million people fell out of the global middle class last year as the K-shaped recovery went international

Brooklyn food pantry coronavirus
People line up outside a food pantry in Brooklyn on Nov. 12, 2020.

  • Roughly 54 million people fell out of the global middle class during the pandemic recession, Pew data shows.
  • About 152 million people sank into the lower-income class or into poverty, reversing years of improvement.
  • Poorer economies saw the biggest losses, adding to the global recovery’s K-shaped trend.
  • See more stories on Insider’s business page.

As economies turn toward reopening and recovery, the coronavirus’ economic toll is coming into focus. The picture is incredibly bleak.

The distribution of COVID-19 vaccines presents a clear end to the pandemic, but new data from the Pew Research Center suggests that returning to pre-pandemic unemployment levels is only the first step toward a full rebound. The firm estimates that 54 million more people fell out of the global middle class in 2020 than would have had the pandemic not emerged.

The classification includes people who live on $10 to $20 a day, or those who earn roughly $14,600 to $29,200 a year. That spread straddles the US poverty line and is well below median earnings in advanced economies.

That decline would’ve been larger had China, which is home to more than one-third of the world’s middle class, not avoided a recession, Rakesh Kochhar, senior researcher at Pew, said. Still, growth in that country has slowed significantly as it faces obstacles to vaccinating its huge population.

Separately, about 152 million people fell from the global upper and middle class into the lower class and poverty. Pew’s definition of global poverty encompasses those living on less than $2 a day, or earning less than $2,920 a year for a family of four.

Like other aspects of the economic downturn, the pandemic’s negative effects have driven an uneven, K-shaped recovery. Middle-class dropouts were most concentrated in South Asia, East Asia, and the Pacific, as those regions saw growth in that cohort stall well before the pandemic hit. The increase in those classified as “poor” was primarily seen in India and Sub-Saharan Africa, reversing years of progress and plunging the regions into new economic pain, Kochhar said.

The regional disparities reflect observations made by the International Monetary Fund in its latest economic projections. The organization expects emerging-market and low-income economies to “suffer more significant medium-term losses,” as they lack the fiscal firepower to power a stronger recovery. Countries with large dependencies on the tourism industry also risk prolonged downturns, the IMF said.

“Recoveries are diverging dangerously across and within countries,” wrote Gita Gopinath, chief economist for the IMF.

At the same time, data collected by Bloomberg show wealthier countries vaccinating 25 times faster than the world’s poorest nations. Advanced economies snapped up doses throughout the fall, creating a shortage that further inflames the recovery’s K-shaped trend.

To be sure, the pandemic only exacerbated trends seen for many years. Most of the world’s population landed in either the low-income or poor groups before the health crisis, while high-earners made up the smallest group. Yet the virus’s damage to service jobs, which are primarily staffed by minorities, low-earners, and women, widened the gaps.

That’s not to say progress can’t be made. The global middle-class population grew by 54 million people annually on average from 2011 to 2019. The pandemic only erased a year of gains at that pace.

Poverty, however, jumped by 131 million people in 2020 after falling at an average annual rate of 49 million people, according to Pew. The setback signals that, at the pre-pandemic pace of improvement, it will still take years to rebound.

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The IMF lifts its global growth forecast with vaccination and stimulus likely to be a shot in the arm

Kristalina Georgieva
IMF Managing Director Kristalina Georgieva speaks at a press conference in Washington D.C., the United States, on March 4, 2020.

  • The IMF will lift its forecast for global economic growth in a report set for release next week.
  • Vaccination and new US stimulus were grounds for the upgrade, the IMF’s managing director said.
  • Still, developing economies are recovering far slower than advanced countries, she added.
  • See more stories on Insider’s business page.

The International Monetary Fund will lift its projections for global economic growth in the wake of encouraging vaccination trends and major new stimulus in the US, Managing Director Kristalina Georgieva said Tuesday.

The IMF will roll out an upgraded set of forecasts for this year and for 2022 next week when it publishes its World Economic Outlook report, she said. The organization’s January estimates saw global output growing 5.5% in 2021 after a forecasted tumble of 3.5% the previous year. The months since have seen COVID-19 cases fall from their peaks, vaccine rollouts begin, and $1.9 trillion in new fiscal support from the Biden administration.

The developments all stand to boost global economic recoveries through the summer, Georgieva said in prepared remarks.

“This allows for an upward revision to our global forecast for this year and for 2022,” she said.

Without “extraordinary effort” from essential workers and scientists, the global recession seen through most of 2020 would have been “at least three times worse,” the managing director added.

The news isn’t all good. Georgieva highlighted that, despite the broadly improved outlook, the global recovery remains uneven and gaps between countries could widen in the coming months. The US and China are likely to reach pre-pandemic levels of gross domestic product by the end of the year, but “they are the exception, not the rule,” she said.

New virus strains in Europe and Latin America are fueling high uncertainty about the region’s prospects. Emerging and developing countries also endured a 20% drop in per-capita income, roughly twice that seen in advanced economies. The plunge leaves emerging countries with a much harder climb back to pre-crisis health.

“They already have more limited fiscal firepower to fight the crisis. And many are highly exposed to hard-hit sectors, such as tourism,” Georgieva said

One upgrade among many

The IMF joins a handful of other institutions turning more bullish toward the US and global rebounds. Fitch lifted its own forecast for global expansion on March 18 to 6.1% from 5.3%, similarly citing stimulus and progress toward reopening. The estimate implies the strongest year of global growth since at least 1980.

US growth will outperform slightly at 6.2%, Fitch said. That’s up from the previous estimate of 4.5%.

“It still looks reasonable to assume that the health crisis will ease by midyear, allowing social contact to start to recover. But immunization delays or problems remain the key risk,” the firm said.

Wall Street giants have also boosted their estimates in recent weeks. Morgan Stanley is among the most bullish, lifting its US growth estimate to 8.1% in 2021 from 7.6% in an early March note. The forecast also calls for US GDP to reach pre-pandemic levels by the end of the first quarter.

Bank of America raised its 2021 US growth estimate to 7% from 6.5% on Thursday, marking its fourth upgrade this year alone. The revision was entirely linked to Democrats’ new stimulus measure and the “exceptional consumer spending” seen among those receiving relief checks, the team led by Michelle Meyer wrote.

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US economic growth will hit 7% this year on major stimulus boost, BofA says in latest upgrade

People Shopping covid NYC
People shopping at the Union Square Greenmarket as New York City continues reopening efforts on December 4, 2020.

  • BofA lifted its 2021 US GDP forecast to 7% from 6.5%, the latest in several upgrades by the bank.
  • The firm sees strong spending already and unemployment falling to 4.5% later this year.
  • The White House’s plan for up to $3 trillion in new spending can further lift growth, the bank said.
  • See more stories on Insider’s business page.

The American reopening is already leading to stronger growth than banks expected. Just ask Bank of America.

On Thursday, BofA economists lifted their 2021 US growth forecast once again on hopes for past and future stimulus accelerating the economic recovery. The upgrade is at least the fourth the bank has made this year.

The team led by Michelle Meyer now expects gross domestic product to grow 7% this year, up from the previous estimate of 6.5%. Output will then reach 5.5% the following year, also an upgrade.

Growth on a fourth-quarter-by-fourth-quarter basis will total 7.7% in 2021 and 4.4% in 2022, the team added. That exceeds the Federal Reserve’s median estimates of 6.2% and 3.4% growth in 2021 and 2022, respectively.

The upward revision is entirely linked to stimulus. The $1.9 trillion measure passed by Democrats earlier this month is already fueling “exceptional consumer spending” according to credit- and debit-card spending data tracked by the bank. Distribution of $1,400 direct payments contributed to a 40% month-over-month spending leap among recipients. The boost might only just be getting started, the economists said in a note to clients.

Total card spending was up a whopping 45% from a year ago and 23% from two years ago for the seven days ending March 20, per BofA data.

“We think consumer spending is about to take off given the one-two punch of stimulus and reopening,” they added.

Hopes for a follow-up spending package added to the bank’s rosier forecast. The White House is organizing a proposal for up to $3 trillion in spending on infrastructure, climate, and education projects to further aid the country’s rebound. Such a plan would drive a more moderate boost to growth over a longer period of time, the bank said.

Tax hikes used to pay for a follow-up spending package could offset some gains, the team added.

Stronger 2021 growth should open the door for a swifter labor market recovery, according to the bank. The team expects a series of encouraging jobs reports starting with the March release scheduled for April 2. Payroll growth is projected to average 950,000 per month in the second quarter and pull the unemployment rate to 4.7% from 6.1%.

The rate will fall more modestly through the rest of the year to 4.5%, the team said. That matches the Fed’s own year-end estimate.

Bank of America’s bullish update follows similarly optimistic forecasts from Wall Street peers. Recent weeks have seen Morgan Stanley, UBS, and Goldman Sachs all lift their own estimates for 2021 GDP growth.

Morgan Stanley remains the most bullish of the bunch, estimating the economy will expand 8.1% this year and return to pre-pandemic output levels by the end of the first quarter. All three banks, along with Bank of America, hold decidedly more hopeful outlooks than the Fed due to expectations for another large-scale spending measure.

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