Democrat sweep to open fiscal floodgates and boost growth
Despite the efforts of Trump supporters to derail democratic proceedings, the Democrats have completed a clean sweep. This has significant implications for spending, taxes, economic growth and interest rates.
Authors
Democrats have completed a sweep of Congress following the double victory in the state of Georgia’s run-off election.
The disturbing scenes of protestors storming Capitol Hill last night may have soured the victory, but nonetheless the Democrat party now have control of the Senate and the House of Representatives for the first time since 2009.
They now have control of Congress and are in position to implement much of President-elect Joe Biden’s agenda.
The near-term impact will be greater fiscal spending, with Biden having already described the recent $900bn bill as a “down payment”.
Expect an enhanced bill, with the stimulus cheques most Americans are set to receive increasing from $600 to $2000, an extension of higher unemployment benefits (from March to June) and increased spending on state and local government. This could add up to another $900bn to the fiscal boost.
Looking further out, there is also the likelihood of an infrastructure bill with an emphasis on clean energy. However, we can also expect higher taxes particularly on the corporate sector, which will weigh on profits.
Our previous baseline expectation was for a split Congress, so the Democrat sweep means we will be increasing our economic growth forecasts for this year and next.
There is still a difficult winter to get through with Covid-19 cases soaring and we would have to see the details of fiscal stimulus. But normal multipliers would suggest adding 1 percentage point to US GDP this year and next. This would take our forecasts to 4.8% and 4.5% for 2021 and 2022 respectively (up from 3.8% and 3.5%).
Such growth would reduce unemployment and close the output gap faster, which in turn would mean greater inflationary pressure. Consequently, we would be looking for an earlier rise in the Fed’s target interest rate, potentially in 2023 rather than 2024.
Although the events of Wednesday night mean that risks remain over a smooth transition of power, the likelihood of a sharp v-shaped global recovery have increased.
Important Information
The contents of this document may not be reproduced or distributed in any manner without prior permission.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.
This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.
Authors
Topics