The Morning Commentary: Another Type of American Exceptionalism
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Another Type of American Exceptionalism
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Andrew Kositkun Senior FX Advisor
One of the more popular narratives in the market over recent months has been reflation. According to a recent survey, 92% of fund managers expect to see higher inflation over the next 12 months. However, experience from the last business cycle has shown how sticky inflation has become. Even with the output gap closing in 2018–19, inflation was remarkably flat, with inflation averaging 1.5% in developed markets and actually trending lower in emerging markets.
As such, it’s hard to see a sustained rise in global inflation over the next few years, as most countries should emerge from the COVID-19 crisis with persistent output and unemployment gaps. The Organization for Economic Co-operation and Development estimates that the 2022 global output gap will be almost as big as it was during the 2008–09 recession. Central banks tried and largely failed to restore inflation to target during the last business expansion and are now facing increased headwinds while also running out of tools.
Given this, the case of U.S. outperformance on growth is building each day. The main catalyst for this is the ever-increasing fiscal stimulus impulse. The U.S. outspent other countries last spring and summer and has continued to do so by continuing to roll out historically large fiscal spending packages as other countries moved to smaller stimulus amounts.
But the fiscal story in the U.S. doesn’t just end with the current $1.9 trillion proposal being discussed. Next up will be a longer-term economic recovery plan that focuses on infrastructure. The plan is likely to invest $2 trillion over four years to build and repair roads, bridges, ports, etc. Beyond supercharged fiscal spending, U.S. growth is also aided by a relatively faster vaccine rollout (see Europe) and a willingness to reopen the economy relatively quickly. Additionally, the Fed’s willingness to allow for an inflation overshoot suggests a slower tightening reaction function to stronger growth than in countries that have a more rigid inflation framework.
To be clear, inflation isn’t a concern anytime in the foreseeable future in the U.S. or anywhere else in the world. Case in point, U.S. CPI data today showed that inflation failed to pick up, with headline and core CPI both coming in at 1.4% year over year against expectations for a 1.5% read on both series. Nevertheless, the factors above suggest that the U.S. is better positioned to hit its inflation target than other countries are.
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