One way of looking at the major economies and the progress they have made towards normalization is to look at three things. One, the quality of the economic recovery in these territories, two, the persistence or otherwise of the expansionary policies, and three, the current efforts at containing the recent wave of infections
The first fiscal stimulus package in the US was to the tune of US$ 2 trillion of which US$ 1.20 trillion was to be direct cash payments to people who qualified for the aid. The second and additional fiscal stimulus instituted by Biden is to tune of US$ 1.90 trillion. This is something which the markets have been eagerly waiting for. These two packages put together and the direct cash which the eligible public got is quite a large amount of money which is capable of helping the demand rise over the coming months.
Biden has unveiled a new infrastructure plan, which again amounts to US$2 trillion. This money is going into massive investment in roadways, railways, and bridges with a focus on clean energy. The plan would also focus on quality of life at home – which will build homes, school buildings, underground water infrastructure and broadband expansion. The third aspect of the plan is improving the conditions for caregivers for elderly and people with disabilities. It will expand a Medicaid program to make more services available and eliminate a backlog that prevents thousands from getting medicare. Fourth, Research, development, and manufacturing – about US$ 300 billion in the plan would be invested in manufacturing, including support for domestic production of technologies and critical goods. Around $50 billion would go toward semiconductor manufacturing and research.
These massive spends are going to take the US economy to a new era of growth and rising demand, employment, and output. The government will collect higher corporate taxes, which is likely to be revised upwards from 21 % to 28% and utilize the same for the projects. There is a clear accent on the demand side as far as counter cyclical policies are concerned, and they are more likely to bear fruits faster. Economic growth is expected to accelerate further, and this is what is getting reflected in the markets too.
Higher growth will come with some amount of inflation. The rising bond yields has been an issue with financial markets, though there has been some reversal in the recent past. Bond yields in other developed markets too moved up. This rise has been occasioned by the rising inflationary expectations which many believe would be a cause for worry. This is despite the fact that the Fed has time and again reaffirmed its commitment to accommodative policy and provision of sufficient liquidity, till growth becomes sustainable. But the central issue is the likelihood of higher inflation as economic growth gathers pace. The Fed Chair recently said that growth may bring with it rising inflation, but he did not expect it to last long. But the assessment of many market participants is that the moment price level starts surging Fed could start combatting inflation with rate hikes. The US treasury 10 Year benchmark which had moved up above the 1.70% levels is currently much lower at 1.60%. A gradual move to a level above 2% is likely over the next two quarters. The US under the new administration has put in place a definitive program for massive vaccination and also other containment initiatives
While the tough posture towards China and Russia continues, there are negotiations under way to re-open the nuclear discussions with Iran. There is some amount of optimism around these discussions. If it concludes on a positive note it will be beneficial to the ME regions as also the US policy as it unwinds a significant amount of war cries and potential violence. The US Dollar is likely to maintain its undertone of strength in the coming months against all currency majors, and this would be to a certain extent due to asset movements into US Dollar in the near future. On the jobs front too the US presents a favourable picture. GDP forecasts put the US growth rate a shade above the 6% mark, for 2021, and close to 5.50% for 2022. UK has gone through tough restrictions earlier this year due to the widespread resurgence of the pandemic. The numbers for Jan-Feb indicate a month-on-month decline to the tune of 2.90%. The economic outlook looks robust with an aggressive vaccination program which surpasses even the US and Europe. The manufacturing PMI improved to 57.90 and the services PMI rose to 56.80 for March. The UK budget has provision for GBP 65 billion as additional support for the economic revival. But not many are happy about the corporate tax hike, though in a graduated form. Bank of England is likely to continue with the soft
money policy till enduring growth reappears on the ground.
The Eurozone is passing through a difficult time as it has not been able to contain the second and third wave of the pandemic, and its vaccination program is also in a shambles. It is these factors that would pull down economic performance in the coming quarters. ECB on its part has been consistently following an easy money policy, and there may not be any reversion from that stance at any time in the near future. They have also expressed strong dislike for the rising bond yields. The liquidity enhancement program of the ECB which is equivalent to Euro 1.85 trillion continues to support the economy and the markets. The program of purchase of securities is likely to be enhanced from Euro 60 billion to Euro 100 billion per month to intensify the ECB involvement in the recovery process and adequately oiling the wheels of the economy, especially in view of the fact that both consumption spending and investment spending are lagging in the Eurozone, the two things which are at the centre of the recovery process. Slowdown in growth is forecast for eurozone for the coming two quarters with the March PMI for manufacturing at 62.40 and the services at 48.80. Eurozone may see a recovery at a much later stage compared to the US or UK.
