- A big stimulus package could trigger economic growth of 7.5% this year in the US, Pimco said.
- The rapid growth would push inflation to above 2% over the coming years.
- Yet the investment giant said inflation is unlikely to spiral, due in part to relatively weak wage growth.
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The US economy could grow by 7.5% in 2021 – a rate not seen since the 1950s – as a result of President Joe Biden’s $1.9 trillion stimulus package, analysts at investment giant Pimco said in a note on Wednesday.
Pimco predicted that although this rapid growth would push up inflation to above 2% over the “next several years”, it is unlikely to cause price rises to spiral due, in part, to the reduced bargaining power of workers.
Pimco head of policy Libby Cantrill and economist Tiffany Wilding said they expected the eventual stimulus package to be close to the $1.9 trillion size that President Biden is seeking.
They said the legislation’s focus on enhancing social safety net provisions such as unemployment benefits, coupled with direct support to households and businesses, “boosts the near-term growth outlook.”
Cantrill and Wilding added that the size of the package may also help to cushion the blow to the economy should any problems crop up, such as a slower-than-expected vaccination program.
They upped their growth prediction for the US economy in 2021 to between 7% and 7.5%, more than making up for the 3.5% contraction in 2020.
A 7.5% expansion would be the strongest since the early 1950s, although the US saw growth of more than 7% in 1984.
Rising growth expectations have troubled financial markets lately, however, as they have led to higher bond yields. This has made stocks look less attractive and pulled down the tech-heavy Nasdaq index this week.
The Pimco note said the rapid economic growth and rise in employment “doesn’t have huge implications for our inflation outlook.” Cantrill and Wilding said this was in part because a decline in labor unions means workers are now less able to achieve wage rises.
Nonetheless, Pimco expects US inflation to rise to 2% in 2021 before dropping to around 1.5% by the end of the year. It then expects inflation to gradually accelerate to a range of 2.2% to 2.5% over the course of the next several years.
“It’s not surprising that more investors are worried about another inflationary accident,” Cantrill and Wilding said.
Yet they added: “While a period of above-target inflation has become more likely, in our view, the likelihood of a self-reinforcing inflationary process similar to what happened in the 1970s is still relatively low.”