The miracle of cheques
US GDP rose at a quarter-on-quarter (q-o-q) annualised rate of 6.4% in the first quarter, according to the preliminary estimate, accelerating from 4.3% in Q4 2020.
Our US economic forecasts are unchanged. We continue to see a super-solid second quarter, with 10% q-o-q GDP growth as US consumers ramping up their spending before the ‘official’ deadline of 4 July (Independence Day) for full economic re-opening. We see especially solid spending on the services most affected by the pandemic, like travel, tourism and restaurants. High vaccination rates are at the base of this forecast. Already, 54.5% of the adult population has received at least a first dose of a vaccine. Our full-year 2021 growth US GDP forecast remains at 6.5%.
Growth in Q1 was powered by a sharp rise in consumption as households were cajoled by the federal government—particularly two sets of cheques (one of USD600 per adult following December’s spending package, and another worth USD1,400 in the wake of the ‘American Rescue Plan’ voted in March). Headline GDP could have been much stronger had inventories not subtracted 2.6 percentage points from headline growth.
But consumption rose a solid 10.7% annualised. Consumers have started Q2 with a big pile of savings (the household saving rate was 21.0% in Q1, up from 13.0% in Q4). We believe these savings will be spent progressively in Q2, especially as the rapid and efficient US vaccination drive pushes consumer and business confidence higher.
Given strong momentum, US GDP is likely to exceed its pre-covid-19 peak in Q2. This rapid return to pre-crisis level is testimony to the intense policy support provided in recent months, including the USD1.9 tn ‘American Rescue Plan’.
The Biden cabinet has put forward additional spending plans to keep growth running beyond this year. Even though more spending packages could be in the offing later this year, we believe they will provide less ‘bang for the buck’ than the American Rescue Plan. The rises in taxation being contemplated are a source of risk on business confidence, although our main scenario for now is continued growth next year—albeit at a lower pace of around 3%. Growth of this level would bring the US economy back to cruising speed after its rapid recovery this year.