Overshooting the old GDP trend path in Q3 21
Key takeaways
We argue that many elements of President Joe Biden’s relief p ackage should be considered as “insurance” (or automatic stabilisers) and not discretionary fiscal spending. A lot will fall out naturally next year. That said, some elements are clearly very stimulating.
We argue that the US GDP will overshoot its pre-corona trend path in Q3 21 and stay above suggesting there are no long-lasting damages to the economy from COVID-19 (on the contrary the support may undo some of the damages created by the last crisis).
We now forecast GDP growth of 7.5% this year and 5.3% next year (up from 3.3% and 3.8%, respectively). We expect the unemployment rate to decline below 4% in H2 21, when activity in the employment-heavy sectors returns to normal.
We argue that inflation is set to move higher but it will take some time before it gets long-lasting. We expect PCE core inflation to reach 2% by end-2022.
Biden’s plan: Discretionary in nature but mostly insurance in practice
President Joe Biden’s relief p ackage of close to USD1,900bn (or 8.1% of nominal counterfactual 2021 GDP assuming nominal GDP would have grown in line with the 2017- 2019 trend in 2020-21 without COVID-19) will soon be approved, on top of the ~USD900bn package agreed upon in December (3.9% of nominal counterfactual 2021 GDP).
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
