Georgia result strengthens likelihood of more US fiscal stimulus
This year started with a surprise in the state of Georgia. The two Senate seat elections unexpectedly won there by Democrats mean a 50-50 Senate, with Democrat vice president-elect Kamala Harris holding the casting vote. As a result, we now see additional fiscal stimulus in the US. Focused on boosting demand, a new package worth USD 750-1,000bn, including new cheques for households, is likely to be voted in the coming months.
We estimate that that the potential upside risk to annual GDP to the tune of 0.5% from a fiscal boost of this magnitude. Its effect will be to boost consumers’ cash pile further, potentially increasing the mini consumption boom we expect by early summer. In addition, our base case is that supplementary unemployment benefits already in place will be extended from mid-March until June.
However, Democrat control of Senate remains narrow and we continue to think that president-elect Joe Biden struggle to pass the most ambitious, spending-heavy items in his presidential programme. A 50-50 Senate could actually expose the sharp divisions within the Democratic camp, already evident during the presidential primaries. We also believe corporate tax hikes are unlikely this year.
There may be upside risk to our already-above consensus estimate of 4.7% GDP growth this year due to the likelihood of more stimulus. But upside risk could be capped by the recent appearance of new, highly infectious strains of the coronavirus in the US and by a vaccination roll-out that is progressing more slowly than initially expected. Recent trends in the pandemic actually expose the US economy to downside risk in the near-term—with a chance of more local lockdowns, and potentially more severe federal restrictions after Joe Biden’s inauguration.
We think additional stimulus will have a limited impact on inflation; we reaffirm our forecast that core PCE inflation will average less than 2% this year and next. This should mean the Federal Reserve stays cool headed and remains accommodative. In our view, the Fed is unlikely to rein in quantitative easing (QE) before 2022. QE might actually be increased in the coming months.