■ Stimulus package. The largest US fiscal program of all time is a done deal. The USD 787 bn American Recovery and Reinvestment Act provides for tax breaks totaling just over USD 200 bn; the remaining threequarters are slated for additional federal expenditures. Furthermore, Obama has spelled out the details of a massive increase in aid for homeowners at risk of foreclosure (pages 5-7).
■ Impulses. We expect the latest fiscal package to create or preserve up to 3½ million jobs and generate growth impulses of up to 2½% of GDP in the coming year – enough to end the recession, but too little to bring about a rapid and strong economic recovery.
■ Debt. The flipside of the unprecedented stimulus programs is a ballooning US budget deficit. In the current fiscal year alone, the deficit will swell to USD 1.4 trillion; that is almost 10% of GDP (cf. chart)! Nor is it by any means certain that the deficit can be reduced as rapidly as projected (pages 8-11).
■ Funding. So far, funding the programs has encountered few problems. Demand for new Treasury paper remains brisk, primarily from abroad. The reason is the high risk aversion that is driving investors to safehaven assets. But once the financial crisis begins to subside, US yields will move steadily higher.
■ Further topics:
- Weekly Comment: Where East meets West (page 2).
- Bank of England: Focus on quantitative easing (page 12).
- Data outlook: EMU-wide business climate likely to stabilize; US GDP to contract more in Q4 2008 than previously announced (page 14).
- Market outlook: EUR and govies remain vulnerable (page 23).
