US-driven global recovery could help lift laggards like Europe, says Powell

The US economy appears set to leave other developed markets in the dust this year with the largest annual growth spurt in decades, new Federal Reserve forecasts indicate, but that divergence is not worrying to the central bank's top official.

If anything, Fed Chair Jerome Powell sees a greater likelihood the strong US rebound from the coronavirus pandemic will help jump-start countries still struggling to find their footing, such as Europe, rather than those weak showings overseas impeding the domestic recovery.

"US demand, very strong US demand, as the economy improves, is going to support global activity as well, over time," Powell said on Wednesday in a news conference following the Fed's latest two-day policy meeting.

"When the US economy is strong that strength tends to support global activity as well, so that's one thing."

Powell's comments came as he was asked about sharply contrasting outlooks that have emerged in recent weeks, in particular between the United States, where the vaccine rollout is on pace and federal relief spending approved in the last few months totals nearly $3 trillion, and Europe, where the inoculation effort is lagging and relief funds approved months ago remain in limbo.

Fed policymakers on Wednesday were the latest to weigh in, forecasting US gross domestic product would surge by 6.5% in 2021 - its fastest rate since the 1980s.

Read more: Stocks rise after Fed tames inflation fears, projects United States GDP surge

That is a 2.3 percentage-point improvement in this year's outlook from their previous forecasts in December and would mark a stunning 10-point swing upward from 2020's 3.5% decline should the economy live up to the new expectation.

By contrast, Powell's transatlantic counterpart, European Central Bank President Christine Lagarde, has said the euro zone economy would likely contract in the first quarter. ECB staff forecasts peg growth in the bloc at 4% in 2021.

"I don't worry for the near term - I mean, I'd love to see Europe growing faster, I'd love to see the vaccine rollout going more smoothly - but I don't worry too much about us in the near term, because we are on a very good track, very strong fiscal support coming, now vaccination going quickly, and cases coming down," Powell said.

"I think we are at a good place."

The divergence is not just with Europe. A Reuters poll last month estimated Japan, too, would suffer a contraction in the first quarter and that fiscal-year 2021 growth would come in at just 3.6%.

Strong US demand is seen supporting Japan's export-reliant economy, a welcome development for the Bank of Japan which is holding a two-day rate review ending on Friday.

Markets are focusing on what steps the BOJ will take to make its policy sustainable enough to weather a prolonged battle with soft inflation, and how Governor Haruhiko Kuroda will describe the outlook for a fragile recovery.

"The strength in the US economy clearly stands out. It means Japan's economy will enjoy a recovery driven by solid external demand," said Mari Iwashita, chief market economist at Japan's Daiwa Securities.

"But external demand alone won't push up inflation, which will stay weak unless consumption grows more," she said.

In the past, divergence in growth and monetary policy among major central banks occasionally caused market turbulence. Not this time with stock prices continuing their ascent, and bond and currency markets taking the Fed's decision with stride.

"We are having diverging recoveries here, as we did after the last crisis," Powell said. "In this case, as well as the other one, the US recovery is leading the global recovery."