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Biden Relief Package, Vaccines Seen Spurring GDP Growth

U.S. gross domestic product (GDP) is now forecast to expand 5.7 percent this year based on the impact of the $1.9 trillion COVID-19 pandemic relief package set for final Congressional passage on Wednesday, falling infection rates and acceleration in inoculations, according to the latest U.S. economic forecast from IHS Markit.

“The imminent enactment of a nearly $1.9 trillion pandemic relief measure, coming against the backdrop of falling COVID-19 infection rates, some relaxation of states’ containment measures and an acceleration of the national inoculation campaign encouraged us to maintain our forecast of GDP growth for 2021 at 5.7 percent and for 2022 at 4.1 percent,” said Joel Prakken, chief U.S. economist, and Chris Varvares, co-head of U.S. economics at IHS Markit.

Prakken and Varares said this growth is expected to push GDP past its previous peak by the middle of this year and eliminate the output gap in 2022. The previous peak of employment will be regained in late 2022 and the unemployment rate is expected to decline to 3.5 percent by 2024.

“The improved economic outlook has coincided with a notable firming in term yields, halting the depreciation of the dollar,” Prakken said. “We now expect the dollar to appreciate modestly rather than depreciate further. This will put downward pressure on core inflation in 2022, but nevertheless by mid-2024 inflation will surpass 2 percent, justifying our call for Fed ‘lift-off’ then.”

The economists said the stabilized dollar will also lower net exports, despite rising domestic oil production that reduces petroleum imports. IHS has revised upward the price of Brent crude oil, but only for 2021. In conjunction with the upward revision in the dollar that undermines import prices, this led to a downward revision in 2022 of core personal consumption expenditure (PCE) inflation from 1.9 percent to 1.7 percent.

The latest reading on U.S. real GDP, adjusted for inflation, saw an increase at an annual rate of 4.1 percent in the fourth quarter of 2020, according to the “second” estimate released by the Bureau of Economic Analysis (BEA) late last month.

“The increase in fourth-quarter GDP reflected both the continued economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some areas of the United States,” BEA said.