Joe Biden was inaugurated as the 46th president of the United States last Wednesday. In the run up to that event, more details about his planned $1.9 trillion stimulus package were released. It will include an increase of additional federal unemployment benefits to $400 a week and extend them through to September, while also making direct cash payments of $1,400 to as many as 150 million Americans. It also calls for $350 billion in aid for state and local governments, $70 billion for COVID testing and vaccination programs, and a raise in the federal minimum wage to $15 an hour. The next issue for markets is timing… when will this stimulus money hit the real economy. Markets will be watching the progress of this bill through Congress very closely.
We also saw the confirmation of Janet Yellen (previous chair of the Federal Reserve) as Treasury Secretary, who shed some light on President Biden’s economic priorities. Despite the US debt burden, Yellen said she was united with the President in a desire to “act big” when it comes to stimulus. In a period of historically low inflation and interest rates, she clearly believes the long-term benefits will outweigh the costs (and risks) of higher government debt. Yellen added that there will come a time to talk about debt – but not until the US economy had recovered from the pandemic. In other words: recovery first, fiscal probity later. Just how much later is anyone’s guess.
President Biden is also likely to favour some tax increases to fund his ambitious domestic spending agenda. Moderate tax increases are on the horizon outside America too. Most major economies have spent big to deal with the pandemic and will face pressure to recoup some of this spending through higher taxes. But this will be a balancing act. Raising taxes too much may snuff out any post-COVID economic recovery.
The Chinese economy continues to outperform the rest
Official Chinese data reported economic growth of +6.5% year-on-year (YoY) in Q4 2020, beating the market consensus of +6.1% growth and building on Q3 2020’s +4.9% increase. For 2020 as a whole, GDP grew by +2.3%, also beating expectations. This places China as the only major economic power to avoid economic contraction in 2020 as the rest of the world continues to grapple with the pandemic.
Other recent China macro data further supports this view of relative outperformance. Fixed asset investment increased by +2.9% YoY in 2020. Industrial production increased by +7.3% YoY, the highest since June 2017, once more beating expectations. These are numbers Europe and the United States can only hope for at best, with both struggling to emerge from the economic impacts of the ‘second wave’.
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