(Reuters) - A huge U.S. fiscal deficit from the first two years of COVID-19 spending should decline rapidly to near pre-pandemic levels, largely due to a rebound in economic growth, analysts at Morgan Stanley (NYSE:MS) said on Thursday.
In a research note, the investment bank's economists predicted the debt-to-gross domestic product ratio should decline 7 percentage points in 2022, after reaching the highest level since World War Two during the pandemic. Real growth will contribute about 6 percentage points and inflation a similar percentage, offset by interest expenses and primary deficit spending.
"Our expectation for fiscal spending in 2022 and 2023 are much more moderate, especially after the failure of the large-scale Build Back Better spending program to pass last year. For 2022, we expect a deficit of 4.1%, and 4.0% for 2023, closely in line with the pre-Covid decade average," the note said.
The economists said interest rate levels and net interest expenses are more important in determining the state of public finances than debt-to-GDP. Interest rates are expected to stay relatively low even if the Federal Reserve tightening, expected to start in March, shifts them marginally higher.
The U.S. Commerce Department said Thursday that the economy notched its strongest growth in nearly four decades in 2021 after the government pumped trillions of dollars in COVID-19 relief.
The economy grew 5.7% in 2021, the strongest since 1984, the government said in a report showing GDP increased at a 6.9% annualized rate in the fourth quarter, following the third quarter's 2.3% pace. Growth is 3.1% above its pre-pandemic level.