The US is the only major economy on the planet to see its GDP shrink this year, and it’s not even close.
That’s according to a new report from McKinsey & Co., and it paints a grim picture for the US as it prepares to exit the international financial system.
The firm’s report comes a month after the Federal Reserve released a new outlook for the economy, and the outlook is still very gloomy.
“The US economy is expected to shrink by 1.2 percent in 2020, its worst growth since 2007, and its third-worst annual performance since the Great Recession,” McKinsey said.
The firm expects that the economy will shrink by 0.4 percent in 2021, its second-worst growth since the recession.
The report also notes that the unemployment rate will jump from 6.4 to 6.9 percent in the US by 2025.
“While the US is not on a path to full employment, the economic outlook is grim,” the report reads.
“Inflation is expected at 6.1 percent this year and 6.6 percent in 2024, up from 6 percent and 6 percent in 2019 and 2021, respectively.”
There is little to no economic slack, and job growth remains weak.”
In terms of the financial system, the McKinsey report paints a similar picture: “The financial system is expected be in a weakened state by 2025, with a strong dollar and dollar-denominated assets accounting for just under 40 percent of total financial assets in the U.S. The share of US banks’ assets held in foreign currencies has declined sharply since the onset of the Great Depression and the financial crisis.”
The McKinsey forecast for 2024 and 2025 puts the US economy on track to shrink in 2021 and 2022, respectively, while 2020 is still expected to be one of the best years for business in the country.
In 2018, the economy grew at a solid 6.3 percent, and McKinsey expects that rate to increase in 2021.
In 2021, the firm expects the economy to grow 2.3 to 2.5 percent, while in 2022, it’s projected to grow just 1.9 to 2 percent.
It also says that the federal debt is expected “to increase to $1.05 trillion by 2025 from $940 billion in 2019.”
However, the country’s fiscal situation isn’t exactly rosy.
While the country had the second-largest GDP growth in the world last year, it saw its deficit hit $6.4 trillion, and this year the country is on track for a projected $4.6 trillion deficit.
As far as fiscal policy goes, the US government is expected by the McKinseys to “remain very flexible,” and in fact, the report predicts that the government will likely be “more constrained” than in the past. “
In particular, the fiscal consolidation measures announced by the administration will be less ambitious than in recent years, as it is unlikely that the new administration will maintain fiscal stimulus for longer than the current fiscal year,” McKinsellys report reads, adding that the administration’s fiscal policy is expected in 2025 to be “in line with the Obama administration’s original fiscal year fiscal plan.”
As far as fiscal policy goes, the US government is expected by the McKinseys to “remain very flexible,” and in fact, the report predicts that the government will likely be “more constrained” than in the past.
However: “We are concerned about the future fiscal situation and the potential for fiscal deficits to increase.”
The McKinseys report also looks ahead to the next several years.
According to the report, the global financial system will remain fragile, and that’s due to the economic, geopolitical, and political tensions that are brewing in the region.
“The United States is already seeing a dramatic shift in its global trade relationship,” McKinseys noted, and with that, a potential disruption to the global economy.
This shift has already been felt, as the US has been hit hard by the geopolitical and economic instability that has occurred in the Middle East and North Africa over the past few years.
“The shift in the global trade relationships will lead to an increase in trade deficits with the United States and potentially a negative impact on global growth,” McKinays report reads.””
This could also affect the US’s ability to finance its military commitments in the next decade and beyond, potentially causing economic instability and a global recession.