With supportive policies cushioning the blow to some extent, pandemic-related restrictions threaten to stall the economy in the near-term as lockdown restrictions continue.
An effective vaccine could potentially be a game-changer. We expect a vaccination programme to be rolled out from early 2021 but its effectiveness may be limited if a large proportion of the population refuses vaccination. Recent polls indicate that over 40% of people would not get vaccinated - we expect 50-60% of the population to be vaccinated by Q3 2021.
Assuming the successful rollout of a vaccination programme, momentum should pick up in H2. We keep our 2021 GDP forecast at 2.1%, reflecting the early drag on activity, even though stronger growth in H2 should return the economy to its pre-COVID level by the end of 2021 - we expect GDP growth to recover to 3.5% year-on-year in Q4 2021.
Improved global demand should boost US exports, but we expect import growth to continue to outpace export growth, resulting in a drag from net exports. The current account deficit should narrow as a percentage of GDP, mainly due to stronger GDP growth. We now forecast the deficit at 2.5% in 2021 (previously 3.0%) and 2.7%, down from 3.0% in 2020.
Policy – staying easy
Given the challenges facing the US economy, policy is likely to stay accommodative in 2021. Pandemic-related fiscal stimulus contributed 12% of GDP in direct support (via additional spending and foregone revenues) and 2.5% in indirect liquidity-related support in 2020. Politics dominates the fiscal policy outlook for the coming weeks and months. The worsening pandemic in late 2020 calls for a new crisis package, especially since enhanced unemployment benefits and incentives for businesses to retain staff finish at the end of 2020. We think Congress will agree on additional spending by then, but it is a close call.
Under a split Congress where Republicans retain control of the Senate, we estimate that new spending could be below the USD 700bn earmarked by Biden for ‘Made in America’ infrastructure funding in 2021-24.
Fed policy makers have indicated that they are prepared to increase the size of the Fed’s Quantitative Easing programme and adjust the parameters to deliver more accommodation if required, including altering the duration of purchases and length of the programme.
Politics – Re-engaging with allies
The Biden administration will be positive for global trade. Biden is likely to have more leeway on foreign than domestic policy. On foreign relations, he is likely to prioritise coordination with traditional US allies and adopt a more systematic approach to resolving China-US disputes, though the increased technology tensions of recent years seem unlikely to recede. He has promised to reengage with international institutions such as the WTO and OECD and re-join the Paris accord on climate change – though a Republican-dominated Senate could limit his ability to follow through on domestic climate initiatives.
Outlook for the USD
We remain bearish on the USD: after 10 years of US asset outperformance, we see potential for significant capital re-allocation to EM markets, now that the election results have been confirmed. Of the roughly USD 1.25tn that was deposited into US money market funds at the peak of the COVID crisis in H1-2020, we believe that approximately USD 800bn remains on the sidelines. We expect a surge into foreign assets, foreign currencies and commodities, including gold, following Biden’s win.
Additionally, the prospect of a divided US Congress suggests that the worst-case scenario of a fiscal stimulus-induced surge in UST yields can be avoided for now.