Huge government stimulus and the rollout of coronavirus vaccines will give the US economy a major boost in 2021, according to the OECD, which more than doubled its forecast for US growth on Tuesday.
The Paris-based economic organization now expects the US economy to grow 6.5% in 2021, up from a prediction of 3.2% in December. The economy shrank 3.5% in 2020 as coronavirus hit, the worst downturn since 1946.
In a report on the world economy, the OECD said Joe Biden‘s $1.9 trillions stimulus plan would also boost economies around the world, especially Canada, Mexico, the eurozone and China. It now expects the global economy to grow 5.6% in 2021, up from 4.2% in December.
“The significant fiscal stimulus in the United States, along with faster vaccination, could boost US GDP growth by over 3 percentage points this year, with welcome demand spillovers in key trading partners,” the report said.
However, it said there were risks on the horizon, including that “slow progress in [global] vaccine rollout and the emergence of new virus mutations resistant to existing vaccines would result in a weaker recovery, larger job losses and more business failures.”
Biden‘s flagship $1.9 trillion stimulus package could be passed by the House on Tuesday after it was approved by the Senate at the weekend. The legislation would send $1,400 checks directly to most taxpayers, and comes after a $900 billion stimulus package was passed in December.
The OECD said in its report Tuesday that “there would be a clear immediate boost from stimulus payments to households, which represent around one-fifth of the overall package of measures.”
It roughly estimated the stimulus could raise US output by around 3% to 4% on average in the first full year of the package. The package “will provide a significant near-term boost to activity if enacted in full,” it said.
In 2022, the OECD expects the US economy to expand 4%, up from its 3.5% prediction in December.
The organization added the US’s major trading partners also stand to benefit, with up to a 1 percentage point boost to output in Canada and Mexico, and up to 0.5 percentage points in the eurozone and China.
The OECD – an economic organization of 37 member countries – said the stimulus package would cause inflation to rise by around 0.75 percentage points a year in 2021 and 2022. But it said the effect after that “is likely to be modest.”
China’s economy is expected to grow 7.8% in 2021, down from the OECD’s 8% prediction in December. Eurozone growth is expected to come in at 3.9%, up from December’s 3.6% prediction.