"You’re face to face... With the man who sold the world"
- David Bowie, The Man Who Sold the World
The term ‘unprecedented’ has been used so much over the past 12 months that you could argue it has become somewhat paradoxical. However, these are indeed extraordinary times.
Under the previous US Administration, the fiscal response to the coronavirus pandemic was unprecedented. Three fiscal stimulus bills (the last of which on a largely bipartisan basis during the lame duck presidential period) totalled somewhere in the region of 15% of US GDP. The current Administration then surprised further with another $1.9 trillion or ~9% GDP. At almost 25% of GDP, the fiscal boost to an otherwise more dynamic, innovative, flexible economy, with fewer pre-existing conditions, likely sees the US widen its growth differential to the rest of the developed markets. The USD should stay on the front foot, in our view.
We have argued on previous occasions that analysts have likely failed to extrapolate the implications for near term growth prospects into FX markets – even if global growth expectations for 2021 were likely suitably upwardly adjusted. It appears that the vast majority of FX commentators continue to express their views of a globalised (if marginally chronologically disjointed) economic recovery. We continue to view differentiation as the biggest driver of market movement for the rest of 2021.
Interestingly, for much of 2020, the central argument for EURUSD higher was that the economic rebound in 2021 would be of greater magnitude in the eurozone than in the US (predominantly as a function of the mechanical rebound from the much bigger drop in 2020). Further, the same analysts continue to see EUR higher now that consensus expectations for 2021 growth, and indeed 2022 growth, in the US are above that of the eurozone. Our view remains that this will not be a uniform global economic recovery; rather it will be a period of widening growth differentials between the US and the rest of the developed markets.
Furthermore, this week, just as the first quarter of 2021 drew to a close, the US President unveiled yet another fiscal stimulus plan. This time however, it was not a covid stimulus, but an infrastructure investment plan.
The infrastructure investment proposal (not a Bill, as it is intended to be pushed through Congress on a partisan basis by use of the reconciliation process – not least because substantial funding for the ‘unprecedented’ spending relies on dismantling the huge Republican tax cutting legislation of the previous Presidential term) has some key spending priorities. For some, there will be a disappointingly low percentage of physical and digital infrastructure spending and a higher than expected amount of social transfers – particularly when we are led to believe that there will be an ‘American Family Plan’ social change proposal, hot on the heels of the infrastructure proposal in April.
Indeed, the Senate Minority Leader quipped “it’s called infrastructure, but inside the Trojan horse it’s going to be more borrowed money and massive tax increases on all the productive parts of our economy”. The US President has been perfectly clear that progressive or wealth redistribution policies will be at the heart of his administration and has shown determination to force his policies through (despite the Democratic control of House and Senate being just 50.8% and 50% respectively). One risk perhaps is that if this “once in a generation investment in the US” fails to improve the productive capacity of the US, then perhaps the social transfers will just be a one-off payment.
We will watch closely to see how this proposal evolves over the course of its passage but ultimately, we find it difficult to see how a significant infrastructure upgrade (even if spread over 8 years) will not increase US productivity and thus the potential growth rate of the US. Further, we do not see anything from other countries (at least yet) which suggests there will not be a widening of growth potential.
There will of course be some ‘mechanical’ rebounds in all economies as they reopen from various degrees of lockdown or restrictions, but the real focus should likely be on the sustained post-crisis growth trajectory – the equilibrium or potential growth rates. On that basis, it is just as important, if not more so, how the stimulus is spent, as well as how much is spent.
Prior to taking office (at least officially), the Italian Prime Minister made a number of comments on the importance not only of providing fiscal support to the economies in the face of the pandemic fallout, but also critically on ‘how’ that stimulus is spent – arguing that Europe will only fully recover from the economic impact of coronavirus if governments use their vastly increased debts to invest in young people, innovation and research – or essentially that “good debt” must be used “for productive purposes”.
The quality of the debt is likely a key metric over coming years and indeed likely decades. In the long run, it is very possible that the US makes the wrong choices on investment, and that other parts of the world manage to turn ‘good debt’ into sustainable productivity growth. However, from our perspective, it will be the non-uniform global growth recovery and its widening differentials in favour of the US and the USD that will remain dominant... for now.
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