We expect the rising threat of COVID-19 to dampen growth in 1H 2021 (specifically Q1 2021), but the level of economic activity created by momentum stemming from Q4 2020 is enough to sustain the US economy during this time, and lift our GDP growth forecast to 3.10% for the year. Further, any additional fiscal support to provide additional income to households, or encourage more ambitious projects such as infrastructure spending, will all help to provide an additional uplift to the US economy during this time.
The current pace of the recovery is also increasing labour force participation, where increased economic output is increasing demand for labour, and in turn, prompting new entrants to join the labour market at a fast pace. If this can continue throughout the year, we see the unemployment rate falling from 6.70% in Q4 2020 to 3.9% in Q4 2021, which would provide a sizeable tailwind in labour income growth in the quarters to come. Following a rough Q1 2021, growth in labour income, and wide spread inoculation of the COVID-19 vaccine to the general public, will help consumer spending on (in-person) services catch up to goods spending, which has already surpassed its pre-COVID-19 level in Q2 2020. Further, developments in the US housing market, such as historically low mortgage rates, the continued migration from cities to the suburbs, and the upgrading and re-modelling of existing homes, have all kept the US housing market strong during the crisis. Given the current economic environment, we expect this will continue to fuel
home-related spending for the remainder of the year.
When it comes to inflation, we expect to see a slight uptick in inflation later on in this recovery cycle, as policymakers have made it clear in their intent to enact policies that will help the more vulnerable areas of the US economy, by proposing a US$1.9 trillion economic stimulus package. With these accommodative policy stances essentially left unchanged, even as output nears pre-pandemic levels in 2021, these policies will only help to lift aggregate demand and, along with it, inflationary pressures in the near future. In terms of monetary policy, we expect the Federal Reserve to maintain its accommodative monetary policy stance throughout 2021, by keeping rates near zero while continuing to expand its balance sheet by a further ~US$1.0 trillion throughout the year. Given this economic backdrop, we forecast core inflation to reach ~2% starting in Q4 2021, further rising to 2.3%-2.4% by the end of 2022/early 2023.
Despite our optimistic outlook for the US this year, there are lingering risks that market participants should be aware of. In the interim, the economic recovery is still dependant upon the path of COVID-19 infections. As the US COVID-19 cases top 26 million, if proper measures are not undertaken to i) control further spread of the virus, and ii) distribute available vaccines fast enough, this could draw out the US recovery. Under this scenario, a more drawn-out recovery would lead to longer stretches of unemployment and more permanent job losses for millions of Americans. If this were to occur, we believe this would weigh on economic sentiment by reducing consumer spending and capital expenditure, as well as put additional stress on hard hit areas of the economy such as the (in person) retail, hospitality, travel, and services industries.
Nonetheless, despite these downside risks, we do believe that the tailwinds are blowing stronger than the headwinds at the moment, helping the US continue its “smooth sailing” towards recovery in 2021.
© Economics Global, Inc.
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