The outlook for economic policies and performance—a presentation

The outlook for economic policies and performance—a presentation

*This presentation (click here: The outlook for economic policies and performance) was prepared for Berenberg’s annual Pennyhill investor conference. Following a brief assessment of global economic and financial conditions and the roles of monetary and fiscal policies in the recovery from the pandemic, it focuses on the solid recovery in the U.S. and the likely policy outcomes during the Biden Administration.

*Global economic performance has rebounded sharply from its deep contraction in the first half of 2020, as global industrial production and trade have regained approximately 90% of their declines. Higher frequency data point toward further gains (Real-time insights, economic and financial pulse, November 30, 2020). China’s economy is recovering solidly, driven by export-related manufacturing.

*Global central banks will remain ultra-easy, led by the U.S. Fed’s aggressive quantitative easing. This will continue to put downward pressure on the U.S. dollar.

*The U.S. recovery has been solid, driven by consumption and production of goods and housing, while services lag. The second wave of the pandemic will temporarily slow the recovery but healthy improvement in 2021 should lift real GDP up to its pre-pandemic level by year-end 2021. Employment will lag. Excess household saving and pent-up consumer demand raise the risks of stronger growth when the pandemic ebbs.

*We expect inflation to stay low in 2021 but there are risks of higher inflation beginning in 2022. As long as inflationary expectations remain subdued, the Fed’s ultra-easy monetary policy will support the stock market. However, real bond yields are too low and are expected to rise as the economy recovers, despite the Fed’s massive purchases of Treasuries.

*The Biden Administration will likely face a split-power Congress, so Biden’s massive spending and tax proposal will be severely constrained by the Senate (US: The economic policy path going forward, December 3, 2020). The result will be moderate fiscal policies, including another pandemic-related deficit spending initiative, and more moderate fiscal packages on infrastructure and climate change/green initiatives. Financial markets favor the prospects of such pros.

*On the international front, President-elect Biden will re-engage in diplomatic relations with Europe and other allies and also in global establishment organizations eschewed by President Trump. Biden will maintain a tough stance on China, but through a coordinated international coalition of allies. He will stop using tariffs as a threat and eventually lower them.

*Biden through Executive Orders and administrative rulings and the establishment bureaucracy will be able to implement most of his expansive regulatory agenda, which is aggressively pro-labor, climate change/green energy and pro-immigration. Although the regulatory environment gets less attention than monetary and fiscal policies, it is crucially important to business decisions and economic performance.

*While moderate fiscal initiatives with higher deficit spending will raise near-term aggregate demand, and an easing of immigration constraints and more conventional approaches to international diplomacy will ease tensions and be positive, the heavy regulations may reduce efficiencies and reduce productivity and undercut sustainable growth.

Mickey Levy, mickey.levy@berenberg-us.com

Member FINRA & SIPC
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