Savannah Chamber

15 9 The main obstacles to faster US export growth are the same as in 2021: COVID-19, the trade war and past appreciation of the US dollar. In addition, foreign GDP growth will be slower that US GDP growth in 2021. In 2021, the US dollar's value will be quite high, which limits prospects for US exports. The US dollar probably will depreciate slightly in 2021, but the depreciation will be minor compared to the appreciation that has recently transpired. Inflation & Monetary Policy Consumer price inflation will increase by only 1.9 percent in 2021, which is above the 1.1 percent rate estimated for 2020. The main reason why inflation will be low is that the economy will be weak and not fully recovered from the COVID-19 recession. The Federal Reserve will keep short-term policy interest rates between 0.0 percent and 0.25 percent in 2021. Many of the usual drivers of inflation will be lacking. The elevated unemployment rate and low levels of capacity utilization reduce the prospects for inflation. The strong dollar will help keep inflation at bay. In 2021, labor market conditions will strengthen, but not nearly enough to support much inflation, much less ignite rapidly accelerating inflation. Indeed, employment will barely grow at all on an annual average basis. The Federal Reserve therefore can continue very stimulative monetary policy without worrying too much about consumer price inflation getting much traction in 2021, but it probably should be concerned about asset price bubbles. The Federal Reserve will keep interest rates low for several years. In addition, the Federal Reserve has increased the size of its balance sheet – quantitative easing – and will do so again in 2021, especially if long-term rates rise too much or if a double-dip recession develops. Crude Oil Markets Absent significant supply interruptions or additional price premiums due to increased political tensions it is likely that oil prices will be higher in 2021 than in 2020, but will remain below the long-term equilibrium level of about $55 per barrel. The global economic recovery is the main factor that will push oil prices higher. Another factor is restraint on the part of non-OPEC producers who will find it very difficult to obtain financing to boost production. Rig counts will be low in 2021. OPEC producers are expected to take back market share from non-OPEC producers. Because oil markets are so volatile, a significant supply interruption would cause oil to trade significantly higher. There is no shortage of potential negative supply shocks. The major downside risk for the oil price outlook is global recession. Productivity In the wake of most recessions, productivity increases and that familiar pattern will play out in 2021, but a limiting factor is that over the last decade there has not been very much capital deepening – adding more capital per worker. The uncertainties surrounding COVID-19 and international trade caused many businesses to further postpone spending for investment. More positively, social distancing and more emphasis on remote work encouraged businesses to invest more in labor saving equipment and processes. The current surplus of workers, however, discourages employers from using their workers more efficiently, which limits productivity growth. Unfortunately, many of the long-term factors behind weak productivity growth will not lessen and may intensify. In the not too distant future, we are likely to see higher overall federal tax burdens to help pay down the national debt. That will limit productivity growth. Another problem is that slower gains in educational achievement contribute to sub-par productivity growth. We are simply not adding enough to human capital to generate average, or above average, productivity growth. Many state and local governments reduced inflation-adjusted spending per student for both K-12 and higher education. Less public support for the nation's research universities erodes our comparative advantage in innovation. Moreover, pubic spending priorities appear to be moving towards providing more support to the retired rather than to educational institutions and students. Access to higher education therefore will continue to be more expensive. Another effect of less public support for higher education is that the US innovation ecosystem will suffer. The aging of the population also limits productivity growth. In general, a less liberal immigration policy limits productivity growth, but not if more visas are given to those with the most skills. Tariffs and trade tensions limit productivity growth and over time can cause productivity to decline substantially. Productivity growth and in turn living standards will rise if the nation's policymakers focus more on improving the innovation ecosystem and focus less on reducing the trade deficit or on restricting the immigration of talented working-age people.

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