Our macro outlook for the US in 2021
The rebound in US GDP, which started in May 2020 after a profound Covid19-related shock in March-April, should continue in 2021; we forecast 4.7% annual growth for full-year 2021 compared with -4.0% in 2020.
An important factor in our scenarios for growth is the mass deployment of vaccines, most likely by the second quarter of 2021. Also important is the fiscal outlook. Our growth forecast is premised on Congress staying divided. A politically divided legislature should mean that fiscal stimulus is limited to USD500-750bn, close to the Senate Republicans’ initial plans.
One significant GDP driver will be personal consumption, which should continue to recover strongly. While the immediate picture is challenged by the renewed rise in coronavirus infections and hospitalisations, there are brighter days ahead as vaccines are mass deployed, buttressing consumer confidence. The key debate when it comes to personal consumption concerns stock vs. flow (in other words, the stock of savings vs. the flow of incomes). We think the stock of accumulated savings over the pandemic months (when ‘excess’ aggregate income grew to USD600bn) could ignite spending when normality is fully restored by the middle of next year. We continue to assume that a modest fiscal package of the order of USD500-750 bn will be approved by a divided Congress.
But vaccines and fiscal stimulus remain the biggest unknowns. On the upside, vaccines could be rolled out more quickly than we assume, and the fiscal package could be more generous than we assume in our central scenario if political agreement can be reached. Our alternative downside scenario is posited on the lack of a fiscal package together with vaccine issues that lead to repeated local lockdowns.
We continue to see inflation remaining dormant, mostly because of the large output gap. The Federal Reserve’s persistent monetary largesse is mostly boosting financial prices. Depending on long-term yields and developments in fiscal policy, we believe that it is more probable that the Fed increases its monthly asset purchases rather than reduce them. The Fed’s anxiousness to support the ballooning US government deficit is one reason for expecting more quantitative easing (QE). The federal government’s budget deficit could reach approximatively USD 2,500bn next year.