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WASHINGTON—The U.S. economy is expected to expand more rapidly in 2021 than officials projected in July, but it will take several years for output to reach its full potential and for the number of employed workers to return to its pre-pandemic peak, according to new economic projections released Monday.

The Congressional Budget Office said it expects gross domestic product, the broadest measure of economic output, will return to its pre-pandemic level by the middle of this year, thanks in part to a surge of relief spending Congress authorized in 2020, including aid for households and businesses.

Gross domestic product is expected to grow 3.7% in the fourth quarter of 2021 compared with a year earlier and to expand 2.4% in 2022. Growth will average 2.6% a year through 2025, the CBO said. The agency said a roughly $900 billion relief bill enacted in December will add about 1.5% to the level of GDP this year and next.

The latest projections will be closely watched by lawmakers weighing how much additional government support the U.S. economy may need as it recovers from the coronavirus pandemic and its economic impact.

Senate Republicans released new details of their roughly $618 billion coronavirus-relief proposal on Monday ahead of a meeting later in the day with President Biden. The GOP proposal is roughly one-third the size of Mr. Biden’s $1.9 trillion plan.

The latest forecasts project a stronger economy this year than CBO expected in July, “in large part because the downturn was not as severe as expected and because the first stage of the recovery took place sooner and was stronger than expected,” the agency said.

But CBO projects economic activity will remain below its potential—or maximum sustainable output—until 2025, suggesting the burst of activity expected this year could be followed by a long, slow recovery.

CBO also estimated the jobless rate will fall to 5.3% by the end of this year from 6.8% at the end of 2020. The number of people who are employed, however, won’t return to the level seen before the pandemic until 2024, the agency said.

It also expects modestly higher inflation and higher interest rates over the coming years than anticipated in July.

President Biden signed two executive orders in late January aimed at boosting pandemic aid, including increasing food assistance and enhancing worker protections. Photo: Ken Cedeno/Pool/Shutterstock (Originally published Jan. 22, 2021)

Write to Kate Davidson at kate.davidson@wsj.com

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