Democrats have unveiled a $2.2tn pandemic relief bill, as additional fiscal spending is crucial in supporting the fragile US economic recovery
The probability for a 5th pandemic-related relief US fiscal package is still below 50%, with political tensions increasing as we move closer -- get ready for the start of the debate season tonight-- to November’s Presidential elections. The gap between the two parties on how to support the economy remains sizeable, albeit narrowing. Democrats’ current standpoint is $2.2 trillion (10% of US GDP) from $3.4 trillion initially, whereas comments from President Trump and the White House Chief of Staff Meadows suggest that the Republicans may support a package totaling $1.3 to $1.5 trillion (6% to 7% of GDP) from $1 trillion. In that context, the prospect of significantly more stimulus to come after the November elections appears more likely, albeit negotiations in the US legislature continue at the time of writing.
Recall that the four coronavirus relief fiscal packages (total: $3 trillion) enacted so far have been pivotal in stemming the adverse economic effects from the pandemic and supporting the expected GDP recovery in H2:2020. According to the Congressional Budget Office (CBO), the insofar enacted pandemic-related legislation had a positive effect on the level of real GDP in Q2 of 5 pps. As a result, real GDP would have contracted by circa 45% qoq saar (-14% yoy), instead of an actual outcome of -32% qoq saar (-9% yoy). For Q3, the positive effect is estimated at about 8 pps, with real GDP expectations at +32% qoq saar (-3.2% yoy), according to the Federal Reserve Bank of Atlanta’s GDPNow forecasting model. Overall, CBO estimates that the already enacted fiscal measures will increase the level of real GDP by 4.7% in 2020, mitigating an extraordinary recession. Note that consensus analysts expect 2020 real GDP growth of -4.4% (NBG estimates: -4.1%).
Looking forward, elevated household savings could continue to gradually feed through to higher private consumption (70% of US GDP) lessening the absence of new fiscal measures. Indeed, households’ savings ratio (i.e. income minus outlays and taxes, as % of disposable personal income) remains particularly high (at 17.8% in July versus a 30-year average of 6.9%). Note that August data are due on October 1st with consensus expecting a still elevated ratio of 12%-14% on the back of consumer spending being deferred during the lockdown period (from late March to early May), alongside the massive government support (in form of, inter alia, direct checks to households and additional unemployment benefits). However, there is elevated uncertainty regarding the pace of re-directing these savings towards consumption, especially in the current, exceptional circumstances. All told, further fiscal stimulus appears an important prerequisite for the US economy to sustain its recent strong momentum in the short term with consensus expecting real GDP growth of +3.8% in 2021 (NBG estimates: +3.7%).
Nevertheless, the insofar stimulus is projected by the CBO to add $2.3 tn to the federal budget deficit in fiscal year 2020 (11% of GDP) and $0.6 tn in 2021 (3% of GDP). As a result, CBO estimates that the federal government deficit will increase to 16% of GDP in fiscal year 2020 (i.e. from October 2019 to September 2020), the largest since 1945, followed by also extraordinary deficits of 8.6% and 6.1% in fiscal years 2021 and 2022, respectively (see graph below). As a result, according to the CBO, the federal debt will reach a record 106% of GDP by fiscal year 2022. At the general government level (including the debt of state and local governments), debt will reach 143% of GDP in 2022 according to the International Monetary Fund (2020 Article IV Consultation, August 2020). Debt dynamics over the long-run are also bleak. CBO estimates that under current legislation, the federal debt will sky-rocket to 195% of GDP by 2050 with a a sharp rise in interest expenses (from 1.6% of GDP in fiscal year 2020 to 8.1% in fiscal year 2050).