With the passage of Joe Biden’s $1.9 trillion coronavirus relief package receiving final backing from the US House of Representatives, the cumulative fiscal stimulus to heal the pandemic-scarred US economy amounts to a staggering 25 per cent of GDP. This reliance on fiscal stimulus to boost US growth is in sharp contrast to the policy response in the aftermath of the 2008 global financial crisis (GFC) when monetary policy was the main tool to ramp up the economy.

From the US perspective, this is good news. There is a general consensus that the economic recovery in the US has indeed been V-shaped. The economy is expected to converge to the pre-pandemic GDP projection after the third quarter of 2021, exceeding it by 1 per cent in the fourth quarter.


The impact on emerging economies is less certain. Recently-released US GDP estimates suggest that the higher than anticipated growth in the latest quarter was largely led by a recovery in the services (non-tradable) sector. Private consumption of goods (tradable) is already back to pre-pandemic levels, while consumption of services remains significantly below pre-pandemic levels.

With the fiscal stimulus in emerging economies being much smaller, the vaccine roll out remaining slower relative to their richer counterparts and the US recovery largely being led by the non-tradable sector, we should expect a divergence in growth between the US and emerging countries.


This unequal nature of growth presents a policy challenge for emerging economies that is very different from what they had to face post-GFC. Post-GFC, a combination of zero interest rates and quantitative easing in advanced economies led to a significant surge in capital inflows to emerging countries in search of higher yield leading to an appreciation of their currencies. Now, the situation is exactly the opposite. The differential rate of recoveries has already led to capital outflow from emerging economies. The hardening of the US yield curve may further fuel capital outflows in coming days leading to tighter monetary conditions in emerging markets.


https://indianexpress.com/article/opinion/columns/us-coronavirus-cases-relief-package-joe-biden-7243679/