“There’s a race right now between these variants of concern and vaccines,” she said during a webcast event Tuesday. She urged “global cooperation and attention” to how disparities in vaccine distribution affect inequality and economic recoveries.

The I.M.F. agrees. Vitor Gaspar, the fund’s director of fiscal affairs, said that advanced economies would continue to be at risk even if the virus were raging in developing countries that are not major economic powers, noting that the virus cannot be eradicated anywhere until it is eradicated everywhere. For that reason, he said, investing in vaccinations is critical.

“Global vaccination is probably the global public investment with the highest return ever considered,” Mr. Gaspar said in an interview. “Vaccination policy is economic policy.”

While global policy bodies are warning about diverging growth and public health outcomes, some Wall Street economists have taken a more optimistic tone.

“We think market participants underestimate the likely pace of improvement in both the public health situation and economic activity in the remainder of 2021,” Jan Hatzius at Goldman Sachs wrote in an April 5 research note.

Vaccinations are high or progressing in Canada, Australia, Britain and the euro area. In emerging markets, Mr. Hatzius wrote, Goldman economists expect 60 to 70 percent of the population to have “at least some immunity” by the end of the year when counting prior coronavirus infection and vaccine proliferation.

“The laggards are China and other Asian countries, although this is mainly because Asia has been so successful in virus control,” he wrote.

How fast global recoveries proceed could be critical to the policy outlook, both in government support spending and in central bank monetary help.

From the Fed to the European Central Bank and Bank of Japan, monetary authorities have employed a mix of rock-bottom rates, huge bond purchases and other emergency settings to try to cushion the pandemic’s fallout.

Organizing bodies have echoed Ms. Yellen’s comment: They argue that it’s important to see the recovery through, rather than pulling back on economic help early.

Global policymakers “generally view the risks to financial stability associated with early withdrawal of support measures as currently greater than those associated with a late withdrawal,” Randal K. Quarles, the Federal Reserve’s vice chair for supervision and head of the global Financial Stability Board, said in a letter released Tuesday.

The I.M.F. said on Tuesday that it was keeping a close eye on interest rates in the United States, which could pose financial risks if the Fed raises them unexpectedly. It also urged countries to maintain targeted fiscal support — and to be ready to provide more if future waves of the virus emerge.

“For all countries, we’re not out of the woods, and the pandemic is not over,” said Gita Gopinath, the I.M.F.’s chief economist.

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How the Stimulus Could Power a Rebound in Other Countries

Washington’s robust spending in response to the coronavirus crisis is helping to pull the United States out of its sharpest economic slump in decades, funneling trillions of dollars to Americans’ checking accounts and to businesses.

Now, the rest of the world is expected to benefit, too.

Global forecasters are predicting that the United States and its record-setting stimulus spending could help to haul a weakened Europe and struggling developing countries out of their own economic morass, especially when paired with a rapid vaccine rollout that has poised the U.S. economy for a faster recovery.

As Americans buy more, they should spur trade and investment and invigorate demand for German cars, Australian wine, Mexican auto parts and French fashions.

The anticipated economic rebound in the United States is expected to join China’s recovery, adding impetus to world output. China’s economy is forecast to expand rapidly this year, with the International Monetary Fund predicting 8.1 percent growth. That is good news for countries like Germany, which depends on Chinese demand for cars and machinery.

just begun to push infections higher in the United States — and a large policy response, including more than $5 trillion in debt-fueled pandemic relief spending passed into law over the past 12 months. Those trends, paired with the accelerating spread of effective vaccinations, seem likely to leave the American economy in a stronger position.

“When the U.S. economy is strong, that strength tends to support global activity as well,” Jerome H. Powell, the chair of the Federal Reserve, said at a recent news conference.

A year ago, it was not at all certain that the United States would gain the strength to help lift the global economy.

International Monetary Fund forecast in April 2020 that the U.S. economy might expand by 4.7 percent this year, roughly in line with forecasts for Europe’s growth, following an expected slump of 5.9 percent in 2020. But the actual contraction in the United States was smaller, and in January, the I.M.F. upgraded the outlook for U.S. growth to 5.1 percent this year, while the euro area’s expected growth was marked down to 4.2 percent.

I.M.F. has signaled that the estimates for the country’s growth will be marked up further when it releases fresh forecasts on April 6.

The recent relief package continues a trend: America has been willing to spend to combat the pandemic’s economic fallout from the start.

America’s initial pandemic response spending, amounting to a little less than $3 trillion, was 50 percent larger, as a share of G.D.P., than what the United Kingdom rolled out, and roughly three times as much as in France, Italy or Spain, based on an analysis by Christina D. Romer at the University of California, Berkeley.

Among a set of advanced economies, only New Zealand has borrowed and spent as big a share of its G.D.P. as the United States has, the analysis found.

In Europe, where workers in many countries were shielded from job losses and plunging income by government furlough programs, the slow pace of the European Union’s vaccination campaign will probably hurt the economy, said Ludovic Subran, the chief economist of German insurance giant Allianz.

On Wednesday, France announced its third national lockdown as infected patients fill its hospitals.

Mr. Subran also questioned whether the European Union can distribute stimulus financing fast enough. The money from a 750 billion euro, or $880 billion, relief program agreed to by European governments last July has been slow to reach the businesses and people who need it because of political squabbling, creaky public administration and a court challenge in Germany.

administered only about 1 vaccine dose per 1,000 people, if that, based on New York Times data. In the United States, the rate is more than 400 doses per 1,000 people.

Still, a booming American economy poses some hazard to other nations — and especially emerging markets — as economic fates diverge.

Market-based interest rates in the United States are already climbing, as investors, sensing faster growth and quicker inflation around the corner, decide to sell bonds. That could make financing more expensive around the globe: If investors can earn higher rates on U.S. bonds, they are less likely to invest in foreign debt that offers either lower rates or higher risk.

If the United States lures capital away from the rest of the world, “the rose-colored view that we are helping everyone is very much in doubt,” said Robin Brooks, chief economist at the Institute of International Finance.

trade tensions with Europe, which the Trump administration treated like an adversary. President Biden met online with European leaders last week.

The U.S. stimulus packages “will be part of the water that lifts all boats,” Selina Jackson, senior vice president for global government relations and public policy at consumer products company Procter & Gamble, said during a recent panel discussion organized by the American Chamber of Commerce to the European Union. “We are hoping for a calm slide out of this economic situation.”

Keith Bradsher contributed reporting.

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Jobless Claims Tick Up, Showing a Long Road to Recovery: Live Updates

filed for state unemployment benefits last week, the Labor Department said Thursday. That was up modestly from the week before, but still among the lowest weekly totals since the pandemic began.

In addition, 237,000 people filed for Pandemic Unemployment Assistance, a federal program that covers people who don’t qualify for state benefits programs. That number, too, has been falling.

Jobless claims remain high by historical standards, and are far above the norm before the pandemic, when around 200,000 people a week were filing for benefits. Applications have improved only gradually — even after the recent declines, the weekly figure is modestly below where it was last fall.

But economists are optimistic that further improvement is ahead as the vaccine rollout accelerates and more states lift restrictions on business activity. Fewer companies are laying off workers, and hiring has picked up, meaning that people who lose their jobs are more likely to find new ones quickly.

“We could actually finally see the jobless claims numbers come down because there’s enough job creation to offset the layoffs,” said Julia Pollak, a labor economist at the job site ZipRecruiter.

But Ms. Pollak cautioned that benefits applications would not return to normal overnight. Even as many companies resume normal operations, others are discovering that the pandemic has permanently disrupted their business model.

“There are still a lot of business closures and a lot of layoffs that have yet to happen,” she said. “The repercussions of this pandemic are still rippling through this economy.”

Shoppers in Berlin’s Alexanderplatz. Germany and other countries have cut their value-added taxes to encourage consumer spending.
Credit…Lena Mucha for The New York Times

The European Central Bank’s chief economist argued on Thursday that fears of a big rise in inflation are overblown, a sign that the people who control interest rates in the eurozone are likely to keep them very low for some time to come.

The comments — by Philip Lane, an influential member of the central bank’s Governing Council whose job includes briefing other members on the economic outlook — are an attempt to calm bond investors who are nervous that the end of the pandemic will lead to high inflation.

Fueling their fears, inflation in the eurozone rose to an annual rate of 1.3 percent in March from 0.9 percent in February, according to official data released on Wednesday, the fastest increase in prices in more than a year.

Market-based interest rates have been rising because investors worry that President Biden’s $2 trillion stimulus program will provoke a broad increase in prices for years to come. The interest rates that prevail on bond markets ripple through the financial system and can make mortgages and other types of borrowing more expensive, creating a drag on economic growth.

Despite big monthly swings in inflation during the last year, the average had been remarkably stable at an annual rate of about 1 percent, Mr. Lane wrote in a blog post on the central bank’s website on Thursday. That is well below the European Central Bank’s target of 2 percent.

“The volatility in inflation over 2020 and 2021 can be attributed to a host of temporary factors that should not affect medium-term inflation dynamics,” Mr. Lane wrote.

That is another way of saying that the European Central Bank is not going to panic about short-lived fluctuations in inflation and put the brakes on the eurozone economy anytime soon.

On the contrary, Mr. Lane’s analysis suggests that the European Central Bank will continue trying to push inflation toward the 2 percent target. In March, the central bank said it would increase its purchases of government and corporate bonds to try to keep a lid on market-based interest rates.

Mr. Lane said it was no surprise to see “considerable volatility in inflation during the pandemic period.” He attributed the ups and downs to quirky factors that are not likely to recur.

Germany and some other countries cut their value-added taxes to encourage consumer spending, then raised them again later. The price of fuel fluctuated wildly. People spent almost nothing on travel, but increased spending on home exercise equipment or products that they needed to work from home. That affected the way inflation is calculated and made the annual rate look higher, Mr. Lane said.

“The medium-term outlook for inflation remains subdued,” he wrote, “and closing the gap to our inflation aim will set the agenda for the Governing Council in the coming years.”

Prince Abdulaziz bin Salman, the Saudi oil minister, has argued that increasing oil output too fast would be risky.
Credit…via Reuters

OPEC and its allies, including Russia, are expected to meet by videoconference Thursday to discuss whether to ease production curbs on oil as countries around the world try to expand from pandemic lockdowns.

Analysts say recent events will support the views of Prince Abdulaziz bin Salman, the Saudi oil minister, who has argued for caution in increasing supply, noting the risks of swamping the market. But other outcomes are possible at the meeting of the group known as OPEC Plus, including modest increases and even cuts in oil production,

France’s reimposition of a national lockdown, announced Wednesday, underlines persistent doubts about the pace of recovery from the pandemic, as have rising case numbers in the United States.

After modest increases when the Suez Canal was recently blocked by a cargo ship, oil prices were rising again on Thursday, with Brent crude, the global benchmark, about 1.6 percent higher, to $63.75 a barrel.

“All signs seemingly point to the group maintaining current production levels,” Helima Croft, head of commodity strategy at RBC Capital Markets, an investment bank, wrote in a note to clients on Wednesday.

Yet pressure may also come to increase supply. Members of the OPEC Plus group are withholding an estimated eight million barrels of a day, or about 9 percent of current global consumption. As the global economy recovers, it will become increasingly difficult for the Saudis to persuade others to restrain supplies.

A ChargePoint charging station in Berkeley, Calif. Shares in ChargePoint rose 19 percent on Wednesday. President Biden’s infrastructure plan supports the use of electric vehicles.
Credit…John G Mabanglo/EPA, via Shutterstock

U.S. stock futures rose on Thursday and tech stocks were set to extend their rally as traders focused on optimism about the economic recovery. Shares in Europe and Asia were also higher before the Labor Department’s latest weekly report on initial applications for state unemployment benefits.

Bond yields pulled back from their recent 14-month high. The yield on the 10-year U.S. Treasury note fell 3 basis points, or 0.03 percentage point, to 1.71 percent.

Last week, jobless claims were at the lowest for the pandemic, but economists have warned against assuming this is the new trend because of measurement issues. New data released on Thursday showed a slight rise in claims for unemployment benefits, On Friday, the Labor Department will publish its monthly jobs report for March.

The occupancy rate in nursing homes in the fourth quarter of 2020 was down 11 percentage points from the first quarter, but there are hurdles to staying out of facilities.
Credit…Amr Alfiky/The New York Times

The pandemic has intensified a spotlight on long-running questions about how communities can do a better job supporting seniors who need care but want to live outside a nursing home.

The coronavirus had taken the lives of 181,000 people in U.S. nursing homes, assisted living and other long-term care facilities through last weekend, according to the Kaiser Family Foundation — 33 percent of the national toll.

The occupancy rate in nursing homes in the fourth quarter of 2020 was 75 percent, down 11 percentage points from the first quarter, according to the National Investment Center for Seniors Housing & Care, a research group. The shift may not be permanent, but this much is clear: As the aging of the nation accelerates, most communities need to do much more to become age-friendly, said Jennifer Molinsky, senior research associate at the Joint Center for Housing Studies at Harvard.

“It’s about all the services that people can access, whether that’s the accessibility and affordability of housing, or transportation and supports that can be delivered in the home,” she said.

But there are hurdles for those who wish to stay out of a facility, Mark Miller reports for The New York Times:

Marigold Lewi and Kimberley Vasquez outside their high school Baltimore City College this month in Baltimore, MD.
Credit…Erin Schaff/The New York Times

A year after the pandemic turned the nation’s digital divide into an education emergency, President Biden is making affordable broadband a top priority, comparing it to the effort to spread electricity across the country. His $2 trillion infrastructure plan, announced on Wednesday, includes $100 billion to extend fast internet access to every home.

The money is meant to improve the economy by enabling all Americans to work, get medical care and take classes from wherever they live. Although the government has spent billions on the digital divide in the past, the efforts have failed to close it partly because people in different areas have different problems. Affordability is the main culprit in urban and suburban areas. In many rural areas, internet service isn’t available at all because of the high costs of installation.

“We’ll make sure every single American has access to high-quality, affordable, high speed internet,” Mr. Biden said in a speech on Wednesday. “And when I say affordable, I mean it. Americans pay too much for internet. We will drive down the price for families who have service now.”

Longtime advocates of universal broadband say the plan, which requires congressional approval, may finally come close to fixing the digital divide, a stubborn problem first identified and named by regulators during the Clinton administration. The plight of unconnected students during the pandemic added urgency.

“This is a vision document that says every American needs access and should have access to affordable broadband,” said Blair Levin, who directed the 2010 National Broadband Plan at the Federal Communications Commission. “And I haven’t heard that before from a White House to date.”

Some advocates for expanded broadband access cautioned that Mr. Biden’s plan might not entirely solve the divide between the digital haves and have-nots.

The plan promises to give priority to municipal and nonprofit broadband providers but would still rely on private companies to install cables and erect cell towers to far reaches of the country. One concern is that the companies won’t consider the effort worth their time, even with all the money earmarked for those projects. During the electrification boom of the 1920s, private providers were reluctant to install poles and string lines hundreds of miles into sparsely populated areas.

Taxpayers who received unemployment benefits last year — but who filed their federal tax returns before a new tax break became available — could receive an automatic refund as early as May, the Internal Revenue Service said on Wednesday.

The latest pandemic relief legislation — signed into law on March 11, in the thick of tax season — made the first $10,200 of unemployment benefits tax-free in 2020 for people with modified adjusted incomes of less than $150,000. (Married taxpayers filing jointly can exclude up to $20,400.)

But some Americans had already filed their tax returns by March and have been waiting for official agency guidance. Millions of U.S. workers filed for unemployment last year, but the I.R.S. said it was still determining how many workers affected by the tax change had already filed their tax returns.

On Wednesday, the I.R.S. confirmed that it would automatically recalculate the correct amount of benefits subject to taxation — and any overpayment will be refunded or applied to any other outstanding taxes owed. The first refunds are expected to be issued in May and will continue into the summer.

The I.R.S. said it would begin processing the simpler returns first, or those eligible for up to $10,200 in excluded benefits, and then would turn to returns for joint filers and others with more complex returns.

There is no need for those affected to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return, the agency said. Those taxpayers may want to review their state tax returns as well, the I.R.S. said.

People who still haven’t filed and expect to do so electronically can simply answer the questions asked by their online tax preparer, which will factor in the new tax break when they file. The agency provided an updated worksheet and additional guidance in March for taxpayers that prefer paper.

Microsoft’s HoloLens headsets, demonstrated above in 2017, will equip soldiers with night vision, thermal vision and audio communication.
Credit…Elaine Thompson/Associated Press

Microsoft said Wednesday that it would begin producing more than 120,000 augmented reality headsets for Army soldiers under a contract that could be worth up to $21.9 billion.

The HoloLens headsets use a technology called the Integrated Visual Augmentation System, which will equip soldiers wearing them with night vision, thermal vision and audio communication. The devices also have sensors that help soldiers target opponents in battle.

The deal is likely to create waves inside Microsoft, where some employees have objected to working with the Pentagon. Employees at other big tech companies, like Google, have also rejected what they say is the weaponization of their technology.

But Microsoft has long courted Defense Department work, including a $10 billion contract to build a cloud-computing system. Amazon had been seen as a front-runner to win the contract, but the Defense Department chose Microsoft.

Amazon claimed that President Donald J. Trump had interfered in the process because of his feud with Jeff Bezos, Amazon’s chief executive and the owner of The Washington Post. A legal fight over the contract is still active.

Soldiers have tested the Microsoft headsets for two years, the company said. The Army said the devices would be used in combat and training.

Microsoft said its testing of the headsets had helped the Defense Department’s “efforts to modernize the U.S. military by taking advantage of advanced technology and new innovations not available to military.”

The devices will “provide the improved situational awareness, target engagement and informed decision-making necessary” to overcome current and future adversaries, the Army said in a news release.

In 2018, Microsoft won a $480 million bid to make prototypes of the headsets. The Army said Wednesday that the new contract to produce them on a larger scale was for five years, with the option to add up to five more years.

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As U.S. Economic Outlook Brightens, Europe Fears a Cloudy Summer

A rapid Covid-19 vaccination campaign in the U.S. holds the promise that millions of Americans can return to beach vacations, barbecues and road trips this summer.

By contrast, Europeans are facing what could be a summer of discontent.

European Union governments had hoped that enough Europeans would be vaccinated in the early part of 2021 to loosen restrictions and allow for a relatively normal summer. For millions of businesses that have hung on all winter—especially in Italy, Greece and Spain, where tourism makes up a large chunk of jobs and economic activity—that would have been an immense relief.

Instead, the slow pace of the EU’s vaccination campaign, compounded by recent concerns over the safety of AstraZeneca PLC’s shot, means Europe’s economy will lag far behind the U.S. Some tourism-dependant countries such as Spain could even contract again this year.

A number of EU countries—including France and Italy—have reinstated strict restrictions and partial lockdowns as they continue to combat high levels of coronavirus infections. According to Google Mobility data, visits to retail and recreation spaces like restaurants, cafes and shopping centers in Western Europe are half the level of pre-pandemic traffic. In the U.S., visits are about 10% below the level when coronavirus hit.

Those restrictions mean the eurozone economy was already expected to contract during the first three months of 2021, entering a double-dip recession, while the U.S. economy is expected to grow 1.5% over the same period.

Now, the slow vaccination campaign suggests the eurozone’s economy will remain mired for months. Big EU countries such as France, Germany and Italy have administered at least one vaccination shot to less than 10% of their population, compared with 23% in the U.S.

Santorini island was quiet in June 2020 as Greece prepared for a return of tourists that ultimately contributed to a second Covid-19 surge in Europe.

Photo: aris messinis/Agence France-Presse/Getty Images

The EU set a target for member countries to have 70% of their populations vaccinated by September, a goal most have said they would meet or exceed. But that pace remains uncertain given supply problems and the refusal of many Europeans to get the AstraZeneca shot.

Now, Giorgio Ravecca, who runs a beach resort on Italy’s northwest coast, worries the Italian government will curtail beach tourism this year. The country has kept its ski slopes shut for the entire winter season, something Mr. Ravecca fears could happen to his sector.

“The authorities have lost so much time with the vaccine rollout that it’s going to come too late to help us this summer,” said Mr. Ravecca.

Tourism and travel contribute around 13% of Italy’s GDP, according to the World Travel and Tourism Council. That share rises to 14% for Spain and 21% in Greece. The share in the U.S. and most of Europe’s north is below 10%.

Total revenues from tourism and travel last year dropped by half in Italy to €88 billion—or $105 billion—and by nearly two-thirds in Spain to €44 billion, according to research firm Oxford Economics.

It is unclear what restrictions governments plan to keep in place for the summer. Allowing vacationers to travel with few restrictions last summer planted the seeds for Europe’s second wave of the pandemic.

While Greece and Portugal have indicated they will begin opening up in May to foreign tourists, a new uptick in infections could lead to delays.

​Europe’s top drug regulator endorsed AstraZeneca’s vaccine after it was suspended in several countries over blood-clot concerns. WSJ explains what’s at stake for a shot that’s been widely used around the world and may soon be considered for emergency use in the U.S. Photo: Mykola Tys/SOPA Images

Before the bumpy start to the EU’s vaccination programs, policy makers had expected a modest recovery in the three months through June that would accelerate sharply during the summer on the back of an acceleration in inoculations. Under that scenario, just under half of the eurozone’s 19 members would return to pre-pandemic levels of output by the end of this year, while the eurozone’s economy would expand by about 4% in 2021, compared with 6.5% growth expected in the U.S. this year.

A loss of the summer vacation business would hit hard.

If the reopening is delayed by three months or longer, the EU expects the eurozone to grow by just 2.5% this year. Instead of reaching pre-pandemic levels of output by early next year, the eurozone economy wouldn’t recover by the end of 2022. Moreover, a slower recovery could leave longer-term damage to the eurozone economy.

Covid-19 and the Economy

Even if restrictions are lifted by this summer, the EU expects neither Italy nor Spain to have returned to pre-pandemic levels of output by the end of 2022, already a year later than Germany, exacerbating a longstanding divide between Europe’s prosperous north and its lagging south.

Indeed, economists at Morgan Stanley estimate that Spain’s economy could shrink again in 2021 if the tourism season is weaker than last year.

While services have been hard hit, some European manufacturers have adjusted to the restrictions, avoiding the closures they suffered in 2020 and enjoying a strong rebound this year.

Industrial production in the eurozone rose slightly in January from the same period a year earlier, ending two years of contraction. In February, Italy’s manufacturing sector expanded for an eighth straight month.

Tourists posed in December in an empty St. Mark’s Square in Venice, Italy, a country that depends heavily on tourism revenue.

Photo: Laurel Chor/Getty Images

Barbara Colombo, chief executive of Ficep, an Italian company that makes machine tools for the steel industry, struggles to find people to fill open jobs in her factories. She didn’t make use of Italy’s Covid furlough program that allowed companies to furlough workers with the entire cost picked up by the government. Her order book is about a quarter below where it was right before the pandemic hit Italy, but she’s expecting the situation to improve this year.

“There is cautious optimism in the (machine tools) sector,” said Ms. Colombo, who has 600 employees. “Orders are arriving and that is giving companies the courage to start investing again.”

However, strong manufacturing is unlikely to fully offset weakness in the region’s large services sector stemming from renewed lockdowns.

At the same time, European banks have been making it harder and more expensive for businesses and households to borrow, worried that the intensifying pandemic would hurt their ability to repay the debt, according to European Central Bank data. Bank lending to eurozone companies ground to a halt between December and January.

The European Central Bank said last week it would step up its purchases of eurozone debt to contain borrowing costs that have surged amid brighter prospects for the U.S. economy and a relaxed stance from the Federal Reserve.

Write to Eric Sylvers at eric.sylvers@wsj.com and Paul Hannon at paul.hannon@wsj.com

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China Begins Withdrawing Pandemic Stimulus Efforts

HONG KONG—As the first major economy to beat back Covid-19, China is now taking the global lead in moving to unwind its pandemic-driven economic stimulus efforts.

Unlike the U.S. and Europe, which are still flooding their economies with liquidity and spending, China has started reining in credit in some corners.

The shift puts China at the vanguard in confronting a challenge other economies will face in coming years as their economies recover: how to withdraw stimulus without snuffing out growth or causing broader market instability.

China’s policy makers have expressed concern about an overheating housing market and want to prevent bigger imbalances. They are also eager to resume a multiyear campaign to curb debt that started building during the previous global recession.

If mishandled, China’s tightening could impair its recovery, which would crimp the global economy. China’s plans could also create wider problems if they trigger more debt defaults or a bigger correction in China’s stock markets, at a time when global investors are already jittery.

For those reasons, economists say, China is likely to move slowly, gradually tightening credit in certain parts of the economy while avoiding more blunt-force moves like raising interest rates.

“It is very clear that China’s policy makers intend to unwind stimulus and tighten policies,” said Ding Shuang, chief economist for Greater China at Standard Chartered Bank, “but they’ve been treading ahead carefully without making a sudden U-turn.”

China signaled its intentions during annual parliamentary meetings held earlier this month. It set its target for 2021 gross domestic product growth at “above 6%,” a relatively low rate given the economy’s momentum and a sign that Beijing wants flexibility to withdraw stimulus in the coming months, economists said. The International Monetary Fund projects China’s economy will expand by around 8% this year.

China lowered its fiscal deficit target—the gap between government spending and revenue—to 3.2% of GDP this year, from 3.6% in 2020. A smaller deficit suggests a more restrictive fiscal policy. The government also cut the quota for local government special bonds, a type of off-budget financing to fund local investments like infrastructure, to approximately $560 billion, down from $576 billion last year.

Beijing didn’t announce further issuance of special central government bonds this year, after selling approximately $154 billion of such bonds in 2020.

“As the economy resumes growth, we will make proper adjustments in policy but in a moderate way,” China’s premier, Li Keqiang, said at a news conference March 11. “Some temporary policies will be phased out, but we will introduce new structural policies like tax and fee cuts to offset the impact.”

Those moves followed earlier steps and were interpreted by investors as signaling tighter credit. In January, the central bank mopped up more liquidity than expected through daily open-market operations, a tool used to control the money supply available to commercial banks. That briefly sent a key short-term money rate to its highest level in five years, making it costlier for banks to borrow funds.

To tame rising property prices, China’s financial regulators recently imposed new rules making it more difficult for property developers, who are typically highly leveraged, to obtain new bank loans.

Broad credit growth picked up some in February, after declining for four consecutive months. Still, analysts expect lending will slow again given Beijing’s recent signals.

In contrast, last week the U.S. enacted a fresh $1.9 trillion economic aid package and the European Central Bank said it would boost its purchases of eurozone debt.

The different approaches reflect how Beijing views the pandemic as a temporary disruption, while Western policy makers are still trying to revive their economies and prevent long-term damage from the pandemic’s effects.

Beijing’s emergency measures last year included cutting taxes to help small businesses and ordering banks to extend more loans. Still, China’s fiscal measures amounted to far less as a share of GDP than those of the U.S. and many developed economies.

At the end of 2020, China’s total fiscal spending on pandemic stimulus was about 6% of its GDP, versus 19% for the U.S., according to IMF calculations.

China’s economy had recovered its pre-pandemic momentum in the last quarter of 2020, largely because of its success in containing Covid-19 and strong exports.


What is the best way for countries to withdraw stimulus without snuffing out growth or causing broader market instability? Join the conversation below.

Now its leaders worry more about controlling debt and other long-term economic issues, analysts say. Last year China’s overall leverage ratio, which measures the ratio of total debt to GDP, rose 24%—the fastest pace since 2009—to 270%, according to official data.

Many economists expect China’s central bank, the People’s Bank of China, to tame the pace of new credit issuance rather than raise key interest rates, which would risk attracting speculative money inflows that can fuel dangerous asset bubbles. The central bank has pledged to keep its monetary policy prudent and flexible, while avoiding flood-like stimulus.

“The market widely interprets PBOC’s tone as more hawkish” than before, said Mr. Ding of Standard Chartered. That could lead to risks, he said, if inadequate communication leads to market overreactions.

Another possible land mine is the potential for tighter credit to cause more defaults among state-owned enterprises. Many are heavily indebted, and local governments, which have their own debt problems, are increasingly wary of bailing them out.

“As China exits supportive measures, some of the problems that got glossed over last year may show up this year,” said Wang Tao, China economist at UBS. “We expect to see more corporate bond defaults and a higher bad loan ratio.”

Write to Stella Yifan Xie at stella.xie@wsj.com

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European Central Bank to Step Up Stimulus to Keep Borrowing Costs Low

The European Central Bank moved Thursday to counteract market forces that are driving up borrowing costs worldwide, saying it would speed up its purchases of government and corporate bonds to make sure that credit in the eurozone remained cheap.

The action signaled that the bank was worried less about inflation than about the economic distress caused by the pandemic and the likelihood that the eurozone was in recession.

The bank had earlier allocated 1.85 trillion euros, or $2.2 trillion, to fight the effects of the pandemic and keep borrowing costs low. That sum remains unchanged, but the bank will now buy bonds “at a significantly higher pace than during the first months of this year.”

Interest rates in the bond market have been rising in recent weeks because investors are worried that inflation could rise when growth bounces back. Investors have been less willing to buy bonds at the same exceptionally low rates as before.

Underlying price pressures remain subdued in the context of weak demand and significant slack in labor and product markets,” Ms. Lagarde said after a meeting of the bank’s Governing Council. She added that she expected the eurozone economy to shrink in the first quarter of 2021, the second quarterly decline in a row, because of the slow pace of vaccinations and extended lockdowns.

Prices in the eurozone rose at an annual rate of 0.9 percent in March after falling for the last five months of 2020. Some economists expect prices to rise further as the effects of President Biden’s $1.9 trillion stimulus plan spill over into Europe.

Ms. Lagarde said the Governing Council had not taken the U.S. stimulus plan into account because it had not yet been signed into law. Mr. Biden signed the bill on Thursday.

The action announced on Thursday sends a strong signal to financial markets, which have been testing the central bank’s commitment to keep lending costs low in the eurozone while governments, corporations and individuals struggle through the pandemic.

Greenpeace activists landed motorized paragliders on the roof of the central bank’s high-rise headquarters in Frankfurt and unfurled a banner reading, “Stop Funding Climate Killers!”

Ms. Lagarde said on Thursday that she was “on the same page” with the activists in many ways, but added, “We don’t think this is the necessary way to conduct a dialogue.”

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