Macroview

US economy: a stimulus-dependent recovery

We now believe the US economy will decline less than we initially feared this year, but with the recovery fragile, we expect further policy stimulus in the weeks ahead.

Thomas Costerg, Senior US economist

US economy: a stimulus-dependent recovery

We have revised our 2020 US GDP forecast to -5.5% from -7.7%. This is mostly because drop in GDP in Q2 (-9.1% year on year) was less steep than initially expected. However, while the US economy is recovering from the depths of the coronavirus shock, but we continue to believe the growth recovery will remain gradual, not V-shaped. Consumer-facing businesses could continue to suffer from social distancing as daily covid-19 infections still remain high. There is evidence that the US economy plateaued in early August. and we still expect the unemployment rate to be around 9.0% at the end of the year. We are especially anxious about the levelling off in consumer confidence. While unexpected additional stimulus could accelerate the recovery path, business investment is at risk of faltering, especially if the global growth (and infection) picture remains weak

US growth is therefore still precariously tied to monetary and budget stimulus. In particular, an extension of fiscal support is needed to avoid a dangerous growth reversal and, crucially, a drop in consumer spending.

We expect additional fiscal support to be approved in Congress. Although talks fell apart in August, we think it is in both camps’ interest to get the economy more solidly on track before the November elections, even though the 12-month budget deficit reached 15.1% of nominal GDP in July 2020. The approaching elections could notch tensions up, but we still think there is a (narrow) window of opportunity to push extra stimulus. A budget deal, perhaps worth USD 1-1.5 trn, could still be found before end-September, when another bill will also need to be passed to fund the budget deficit for the new fiscal year starting in October (otherwise there is another partial federal shutdown).

We have long been of the view that the Fed would increase its monthly asset purchases (currently USD 120bn per month) in the second half of the year.  The Fed’s new, stronger commitment to boost inflation could mean action on asset purchases sooner rather than later; we now see a growing probability this increase could come as soon as the next meeting on 15-16 September.

This said, getting a new fiscal package through is likely to be of more help to the ‘real’ economy as, apart from indirectly helping to absorb huge debt issuance, there is still not clear evidence that Fed asset purchases have effectively percolated down to the real economy.

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