21 January 2021
As we head into 2021 and we see continued recovery of the global economy, but the struggle between the virus and our efforts to control it continues. The outlook for the global economy hinges critically on health outcomes and with this, the path to recovery is likely to prove patchy across industries and countries, even with an effective vaccine in sight.
US under unified democratic control
With the Presidential Inauguration taking place today, Joe Biden can now begin to prioritise the policies he intends pushing through and at the same time make significant regulatory appointments.
The market views the Democrat’s ‘slim’ majority as an indication of the likely continuation of stimulus programs. It also seems to have largely shrugged off rioting on Capitol Hill that interrupted Congress’ certification of the presidential election result.
Whilst the vaccine rollout has been slow as a more infectious strain of the virus is spreading, investors continue to discount anything materially changing in terms of economic impact.
Economic data continues to reflect previous stimulus payments rolling off, as well as rising COVID-19 cases and pre-election uncertainty. US December retail sales provide the most recent example, falling -0.7% versus an expectation of 0%. Consumer sentiment surveys also remain soft.
Looking forward, we expect these indicators to improve as a combination of stimulus, vaccines, accommodating central banks and pent-up demand should win out.
Biden’s “American Rescue Plan”
President-elect Biden has released the details of his COVID-19 relief plan estimated to cost $1.9 trillion dollars (8.6% of GDP). In addition to the roughly $950bn Congress approved in December 2020, President-elect Biden is proposing $1.9 trillion in new fiscal relief measures, which includes:
- $170Bn for schools to be able to respond to COVID-19.
- Extension of the health insurance subsidies.
- Additional $1400/person stimulus payment (not including the $600/person approved in December 2020).
- Extension of the additional unemployment benefits.
We expect that the proposal will face hurdles in Congress and will likely be watered down. Biden’s transition teams and congressional Democrats have indicated they hope to pass this proposal via regular order, not the budget reconciliation process. This means the stimulus package would need 60 votes in the Senate, and therefore the support of at least ten Republicans, which may be hard to come by.
The majority of funding in the increased stimulus package will take time to reach the economy. Where funding has been previously approved by Congress, it looks likely those funds will need to be used before any additional funds can be committed. For example, last month saw $82bn in education grants and $69bn in public health funding approved.
As it stands, nominal disposable income is expected to surge in Q1/Q2 2021 to levels above that of Q2 2020. Coupled with pent-up demand as lockdowns and restrictions are rolled back, this is likely to provide strong economic tailwinds. Goldman Sachs last week upgraded its 2021 US GDP estimate from 4.1% to 6.6%, with 10% growth in Q2 and 9% in Q3.
Recovery moving into 2021
The recessions seen around the world in 2020 have been sharp and deep with extensive supply-chain disruptions. Industries that rely on face to face contact have been particularly hard hit. However, we have seen policymakers being far more aggressive and timelier in supporting financial markets and their economies.
Consensus baseline growth forecasts assume an effective combination of vaccine rollouts and therapeutic treatments will gradually allow an easing of government restrictions on social interaction and a lessening of consumers’ economic hesitancy.
We expect the recovery’s path to be both uneven and varied across industries and countries, even with an effective vaccine in early rollout. We also expect it will take some time before many economies return to their pre-COVID-19 levels of employment and output.
The unevenness in the growth and recovery outlook is reflected in the world’s major economies such as China, where control of the pandemic has been more effective with China swiftly attaining near pre-pandemic levels of activity. Elsewhere, the virus’s prevalence has been less well-controlled.
We expect both monetary and fiscal policy will remain supportive throughout 2021, but the primary risk factor is the pandemic’s fate and path.
For more information, please speak with your adviser. If you would like to discuss your current portfolio or require assistance developing an investment strategy, get in touch with the Findex Wealth Management team.