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Edition 10 - ECONOMICS AND MARKETS

A game-changing year for the United States

The next 12 months will set the parameters for the United States’s economic growth over the next decade, and its role in global politics and trade. Much like 2020, this year will be one to watch for the world’s biggest economy.

For the US, 2021 is a seminal year. Not only does the world’s economic powerhouse need to recover from the COVID-19 pandemic, it has a very different president in Washington, a deteriorating relationship with some of its allies and China, and polarisation across the political spectrum.

Like all democracies, the ruling party in Washington plays the most influential role. There is a Democratic president and now, a slim majority for the Democrats in the Senate, which means that the Democrats have a better chance of passing their own policies, rather than if Congress were to have split control between the Democrats and the Republicans.

However, any change to policies will be gradual, and new legislation (especially around potential taxation hikes for households and corporates) may be tempered by more moderate or conservative Democrats.

Some of Biden’s proposed measures look likely to make it through in the short term – such as at least another US$1 trillion in fiscal stimulus, probably inclusive of $2,000 stimulus payments to a large share of US households1. This is on top of the US$900 billion (or 4 per cent of GDP) stimulus already passed in December2. Following this round of fiscal stimulus, the next stage of stimulus may come in the second half of the year focused towards infrastructure and climate-related spending which will be “paid” for by higher taxes on corporates and high-income individuals.

Biden has also garnered a reputation as an environmental warrior, having outlined a US$2 trillion plan to fight global warming during the election campaign3. “Some of the energy players could take a hit because of the expectation that a Biden Administration is going to be harsher on high polluting types of companies. While they may benefit a bit from any fiscal stimulus, they could face more regulation. That’s something to consider during the second half of 2021,” says Diana Mousina, Senior Economist at AMP Capital.

“That could happen around the tech names as well, though it may take longer. No matter what administration is in power, the world is moving towards greater regulation of the tech industry. We are seeing that in the US and in Australia, with more regulation around Facebook and Google.”

In the US, the Federal Trade Commission and around 40 states have accused Facebook of buying up rivals to quash competition. In Australia, the government has introduced legislation into federal parliament that would enshrine a code of conduct for the large technology platforms, and force Google and Facebook to pay for the content created by media companies, and available on their platforms4.

No matter what administration is in power, the world is moving towards greater regulation of the tech industry. We are seeing that in the US and in Australia, with more regulation around Facebook and Google.”

– Diana Mousina, AMP Capital
 

Infrastructure is literally nation building, and a great way of boosting an economy while bringing people together. It too will be impacted by the new Administration.

“Biden has a very big infrastructure agenda. I think that could probably get bipartisan support for that maybe the second half of the year.”

Under the Trump Administration, the US held a more aggressive trade policy particularly with China. The president followed a buy-America policy and accused China of unfair trading practices and intellectual property theft. For many, the perception in China was that America was trying to curb its rise as a global economic power.

“I think the overall stance around being tough on China is still likely to continue,” Mousina says. “When Biden was vice president to Barack Obama, that was the type of position he held,” Mousina says.

“He is unlikely to be rolling back tariffs. They still want to reduce the trade deficit that the US runs with China. They will continue to put pressure on Chinese firms that are operating in the US. But the Biden Administration may not actually ramp up tariffs and is more likely to work with allies to negotiate with China around its trade policies and regulation.

“That may not be favourable for Australia. Obviously, Australia is in a tough position with China. If the US asked us to back them on some type of anti-China negotiations, that wouldn’t be positive for Australia,” she adds.

“But, at least, there’s a benefit for equity markets under the new Administration. Investors don’t like tariff wars because it increases costs for businesses and tends to be seen as negative for economic growth. But if its just rhetoric, equity markets won’t necessarily be spooked by that. It would be much more negative if there were direct tariff wars.”

Biden has said he will take a more multi-lateral approach to global politics, re-committing to the World Health Organization, the Paris Climate Agreement and potentially the Trans-Pacific Partnership after the Trump administration cut ties with these organisations, citing few benefits versus costs to the US from its membership.

So could 2021 be the year in which the economic powerhouse mantle is passed from the US to China?

Mount Rushmore

“Well in purchasing power of parity (PPP) terms, China already is the biggest economy,” Mousina says.

A little explanation is needed here: The US is still the world’s largest economy, churning out around $US21 trillion worth of goods and services each year5, measured in US dollar terms. In nominal gross domestic product terms, the US is 50 per cent bigger than China, and four times bigger than the world’s third largest economy, Japan. It’s about 15 times the size of Australia.

But it is no longer the biggest economy in PPP terms. That’s a measure of 'bang for buck' – it equalises the purchasing power of different currencies by eliminating the differences in price levels between countries6.

“I think China will keep taking a dominant position. Part of the reason why the US and its allies are concerned about China is because they are building their own global business leaders in the tech space, and they are doing that quickly,” Mousina says.

“China has a huge number of names that are very big players in the global trade market. And the middle-income population has so much further room to grow. The Chinese economy is going to become bigger and richer,” she says.

“More broadly, I think Asia will be the driving force for global growth over the next 10 to 20 years, and especially China. Its rise will positively impact other Asian countries – economies like Korea, Indonesia and Japan. That’s good for Australia as long as we don’t continue our trade disruption with China.”

Mousina is confident that a vaccine will be rolled out in 2021. “It’s already happening in the United Kingdom and I think at least 50 per cent of the population will take it up. That’s the type of threshold you need to see herd immunity starting to develop,” she says.

“Also, governments will start to put in place regulations where you won’t be able to do things unless you have the vaccine. It will be the same for what we do now with basic viruses.”

Mousina says the AMP Capital economics team is forecasting that the US economy will grow by 4.8 per cent next year, after contracting by 3.2 per cent in 2020. But it will take until 2022 for the economy to be tracking at the same growth path it was before the coronavirus pandemic.

“The way the US has been growing over the past six months has been extremely strong, even though they’ve had a huge number of cases coming in this third wave, over the past two to three months,” she explains.

A risk for the US in 2021, is what happens in Congress, and whether the Biden Administration can get its legislative agenda through both the Senate and the House of Representatives. Again, though the Democrats have a majority in the Senate, it’s a slim lead.

At least, there’s a benefit for equity markets under the new Administration. Investors don’t like tariff wars because it increases costs for businesses and tends to be seen as negative for economic growth. But if it’s just rhetoric, equity markets won’t necessarily be spooked by that. It would be much more negative if there were direct tariff wars.”

– Diana Mousina, AMP Capital

 

“But for the time being, the biggest risk for any country is what happens with the vaccine. When does it get rolled out? That is when you will really start to see business investment profiles changing and you will see more spending.”

There’s one more X factor. Donald Trump and his base.

“He has a huge amount of support. He didn’t get the majority of the population voting for him, but he got a large number of people supporting him. There’s still going to be a lot of people unhappy with Joe Biden being the president.

“I think that Trump, and his support base, will still play a role in politics. There will still be a very pro-America, pro-manufacturing jobs, anti-China political base. And you could easily see Trump starting some new political party or his offsiders doing that. I think he still wants some voice in the political discussion.”

So will 2021, like this year, be dominated by COVID-19?

“Yes,” Mousina says. “The stimulus package that eventually passes will be the main driver of growth outcomes in the first six months of next year in the US. And then it depends on the vaccine roll-out.”


Footnotes:
1. https://www.cnbc.com/2021/01/14/biden-stimulus-package-details-checks-unemployment-minimum-wage.html
2. https://www.economist.com/united-states/2021/01/02/congress-injects-a-further-900bn-of-stimulus-into-the-american-economy
3. https://www.nytimes.com/2020/07/14/us/politics/biden-climate-plan.html
4. For background, please see https://www.theguardian.com/media/2020/dec/09/australia-is-making-google-and-facebook-pay-for-news-what-difference-will-the-code-make and New York Times, December 9, 2020
5. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=US
6. https://www.oecd.org/sdd/prices-ppp/purchasingpowerparities-frequentlyaskedquestionsfaqs.htm


 

Important Notes

While every care has been taken in the preparation of these articles, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in them including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. Performance goals are merely goals. There is no guarantee that the strategy will achieve that level of performance. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. These articles have been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. They should not be construed as investment advice or investment recommendations. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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