The US economy bounced back in the third quarter – growing at a 33.1 per cent annual rate – as businesses reopened and stimulus cash powered consumer spending, recovering from the collapse in economic output earlier this year.
The US Commerce Department’s report on Thursday marked the fastest pace of annualised growth on record just after the worst drop on record in the prior three months, when the economy contracted at an annualised rate of 31.4 per cent. But it still left US economic output below pre-pandemic levels.
“The US GDP data is not a big surprise because we recorded the biggest decrease ever in Q2,” said Seth Carpenter, chief US economist with UBS Group. “We are in a much slower economy now and the rising Covid-19 cases leads to less job creation. We expect positive gross domestic product growth and job growth in the fourth quarter.”
However, analysts have cautioned that growth will be much more modest in the months to come, especially as the virus spread gathers pace and US lawmakers remain unable to agree on a new fiscal stimulus package.
Saxo Bank predicts a K-shaped recovery for the US economy irrespective of who wins the November 3 presidential election. High-income Americans will see jobs come back and income grow, while middle-and lower-class people will not, the bank said earlier this month.
The timing, date and size of any stimulus will depend on the outcome of the US presidential election, which is only five days away.
“The major implications on fiscal policy and as a result macro-economic performance will come more from a consolidated government versus a split government than from a Biden vs Trump win,” UBS's Mr Carpenter added during a discussion on the global implications of the US presidential election on Thursday.
Under a status quo scenario of a Donald Trump win, he predicted a Covid-19 fiscal relief package in the range of $500 billion to $600bn in the first quarter of 2021. However, with a split government and mid-term elections in 2022, Mr Carpenter said partisan politics would prevent further meaningful fiscal policy. There is also likely to be a further escalation of trade tensions and a decoupling of relations between the US and China under this outcome.
If Joe Biden wins and in the case of a Democratic sweep, the UBS economist estimated a larger Covid-19 fiscal stimulus than under the status quo. It could be implemented in January and will be close to $1 trillion.
“Because the Biden administration has a long list of ambitious plans, the US can expect a multi-year, multi-trillion dollar spending package focusing on infrastructure, healthcare and education in the second half of next year. The proposed tax rate increases are likely to be implemented in 2022 and will likely result in a fiscal boost to the US economy, adding three percentage points to real GDP growth,” Mr Carpenter explained.
If Mr Biden wins the election more narrowly, with the Democrats failing to take the Senate, the US will receive a smaller Covid-19 relief bill in the first quarter of 2021, almost $150bn to $200bn smaller than under a status quo scenario. “After the initial burst in Q1, there is likely to be very little fiscal policy support later,” Mr Carpenter said.
Investors are in a state of “trepidation” about the possibility of a contested election, Tom McLoughlin, head of Americas fixed income at UBS Global Wealth Management, added.
“Markets are likely to take a risk-off position until the impasse is resolved in terms of litigation,” he warned.
Citing how political affiliation impacts investor optimism regarding the direction of the economy, Mr McLoughlin said that investors disappointed with the election outcome would adopt a risk-off strategy and vice versa.
“Around 62 per cent of global investors plan to make portfolio adjustments after the US elections. That’s a concern,” he added.
Although the euro is expected to strengthen against the US dollar over time in all outcomes of the US presidential election, this will be faster under a Democratic sweep, said Caroline Simmons, UK chief investment officer at UBS.
“Nearly 20 per cent of European equity markets’ revenues are generated in the US. Any changes to currency or corporate tax rate in the US will affect that revenue stream for Europe,” she added.