For decades, China’s economy has grown much faster than America’s. That trend is likely to be broken in 2021 as the US recovery from the pandemic gains momentum.
Economists are swiftly upgrading their US growth forecasts as Covid vaccinations accelerate and after Washington enacted a $1.9 trillion stimulus package that is far larger than many thought possible just a few months ago.
Goldman Sachs is calling for 2021 US GDP growth of 6.9%, the fastest since 1984. Morgan Stanley is even more bullish, predicting 7.3% growth. That would surpass the Chinese government’s humble target of 6%. More importantly, these Wall Street estimates for the US’ pace are not far from the 8.4% consensus forecast for China among economists polled by Refinitiv.
All of this means that US GDP growth could rival or perhaps even surpass that of China. This would be a remarkable achievement because the United States is a much more mature economy — and was blown away by China’s explosive growth out of the Great Recession.
“We’re going to be in the ballpark — and I think the US will most likely be the leader,” said Joe Brusuelas, chief economist at RSM.
For average Americans, this optimism signals a stronger jobs market and better prospects for prosperity after a dreadful 2020. Morgan Stanley expects the US unemployment rate will drop below 5% by the end of this year and below 4% by the end of 2022.
China has beat the US every year since 1976
The last time the two countries’ growth rates were even somewhat close was during the dotcom boom. In 1999, the roaring US economy grew at 4.8% and China expanded at 7.7%, according to the World Bank.
The United States hasn’t surpassed China’s GDP growth pace since 1976, World Bank stats show.
Brusuelas recently upgraded his US GDP growth forecast to 7.2% for 2021 because of the size of the American Rescue Plan and progress in defeating the pandemic. And the RSM economist said the risk is that he’s not being optimistic enough.
“We could all be underestimating the coming expansion,” Brusuelas said. “This could literally be the single largest expansion since the middle of the 20th century.”
That would be a stark contrast to the last recovery.
In 2010, as the rebound from the Great Recession took hold, China’s 10.6% GDP growth quadrupled that of the United States. And in 2019, before Covid erupted, China grew at nearly triple the pace of the United States.
Of course, these are just forecasts. The US recovery could lose steam if vaccinations hit a snag, Covid variants cause problems or another obstacle emerges.
And it’s important to note that if the United States does rival China’s growth this year, it will probably be a one-off.
China is a much younger economy, with demographic and productivity advantages that will lead to faster growth there over the medium and long term.
“If it happens, it is very unlikely to be repeated beyond 2021 since China’s potential growth is higher than the US,” said Alicia Garcia Herrero, chief Asia-Pacific economist at French bank Natixis.
‘The global locomotive’
Still, 2021 looks to be the year when the United States replaces China as the biggest growth driver on the world stage, at least temporarily.
Oxford Economics expects the US contribution to 2021 global growth to be stronger than China’s — something that hasn’t happened since 2005.
“The US economy is going to once again become the global locomotive. And it will help pull the rest of the world out of this Covid crisis,” said Gregory Daco, chief US economist at Oxford Economics.
Daco is expecting 7% US GDP growth this year, and he also wonders whether economists are underestimating the pace of the rebound, as they did last summer when the pandemic eased for a few months.
“People were surprised by the speed of the recovery in the wake of the unprecedented shock. We could be surprised on the upside again,” Daco said. “Sometimes optimism feels odd when you come out of a deep recession, but we have the right ingredients to form a fairly powerful cocktail.”
Georgia was a game-changer
The $1.9 trillion American Rescue Plan is a major factor behind the optimism.
After President Joe Biden’s election in November, many economists thought a divided Washington would only be able to agree on a relatively modest stimulus package in 2021.
However, that calculation began to change after Democrats retook the Senate in January by sweeping the runoffs in Georgia. That opened the door to passing party-line legislation to boost the economy.
The day after the Georgia races were called, Goldman Sachs upgraded its GDP growth forecast to 6.4%, up from 5.9% previously and well above the consensus of about 3.9%. Goldman Sachs predicted $750 billion in fiscal stimulus in February or March.
In reality, Washington ended up enacting a far larger stimulus package of $1.9 trillion, featuring $1,400 stimulus checks, enhanced unemployment benefits, larger child tax credits and $350 billion in aid to states and local governments.
Reopening hopes are on the rise
Beyond the rescue from Uncle Sam, the economic outlook is getting a boost from serious progress in defeating the pandemic. The acceleration in the rollout of vaccines, along with plunging deaths and cases, is raising hope that health restrictions depressing the economy could be lifted earlier than expected.
And that should unleash enormous pent-up demand among Americans to eat at restaurants, go to the movies, stay a hotels and hop on planes. Many consumers have stocked up cash waiting for just this moment. Morgan Stanley estimates US households have built up $2.3 trillion in excess savings — money that can be drawn down as the economy reopens.
The total size of the US economy is now on track to reach its precrisis level by the end of March, Morgan Stanley said.
“Reopening is progressing, the rate of vaccinations is ramping and the labor market is gaining momentum,” Morgan Stanley economists wrote.