Perspectives

As the epidemic wanes, the economy soars

nd  
Eco Perspectives // 2 Quarter 2021  
economic-research.bnpparibas.com  
4
UNITED STATES  
AS THE EPIDEMIC WANES, THE ECONOMY SOARS  
The US economy has taken off. Bolstered by the easing of the Covid-19 pandemic as much as by unprecedented  
fiscal support, GDP will soar by at least 6% in 2021, surpassing the pre-crisis level of 2019. Inflation will accelerate  
and temporarily overshoot the Federal Reserve’s 2% target. Nonetheless, the central bank will not deviate from  
its accommodating stance. The Fed’s top priority is employment, which continues to bear the scars of the crisis  
and has a long way to go before making up for all of the lost ground. As a result, monetary conditions will remain  
accommodating, both for the economy and the markets, even at the risk of encouraging some excessive behaviour.  
Even as the United States passes the tragic threshold of 500,000  
Covid-19 deaths, hopes are rising, day after day, that the crisis is nearing  
an end, bolstered by the acceleration of the vaccination campaign  
GROWTH AND INFLATION (%)  
(
170 million shots have already been given) and the concomitant  
GDP Growth  
Inflation  
decline in the rate of new cases, which has fallen practically to the  
lowest level since the pandemic began. In a televised speech, President  
Biden used the symbolic date of July 4th – Independence Day – for  
the possible return to normal. Google mobility indicators are already  
showing signs of improvement: following the rebound in employment  
Forecast  
Forecast  
6.9  
7
5
3
1
1
3
5
4.7  
(
916,000 jobs were created in March), they confirm that consumer  
spending has picked up again as a growth engine, after stalling in the  
last months of 2020.  
2.2  
2.5  
2.2  
1.8  
1
.2  
This growth engine will have no shortage of fuel. The American Rescue  
Plan, adopted on 11 March 2021, is a gigantic, USD 1.9 trillion stimulus  
package (9 points of GDP), which the Biden administration is widely  
targeting at households through stimulus checks, unemployment  
benefit boosts and tax credits (see box). It is still too early to say  
whether Americans will have a greater propensity to spend or to save  
this financial windfall. Either way, the impulse is so strong that the  
economic growth rate can only be revised upwards.  
-
-
-
-3.5  
2020  
2019  
2021  
2022  
2019  
2020  
2021  
2022  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
GROWTH SURGES TO MORE THAN 6% AND INFLATION RE-  
BOUNDS  
THE LATEST COVID-19 WAVE HAS BROKEN  
New daily cases, per 100.000 inhab. (LHS)  
Daily deaths (RHS)  
According to CBO estimates, the output gap – the production shortfall  
that must be closed before the US economy returns to its potential – is  
USD 960 bn. Twice as big, and coupled with the USD 900 bn stimulus  
extension voted in December 2020, the American Rescue Plan would  
quickly close the gap, even with a low multiplier. Assuming a multiplier  
of 0.5 and that most of the stimulus plan’s USD 1.9 trillion will be  
rapidly deployed, the economy would grow by at least 6% in 2021.  
Under these circumstances, the US economy would be operating near  
full capacity approaching fall. At the current pace of vaccinations  
7
0
3 200  
60  
2
400  
50  
40  
30  
20  
1 600  
(
2 million shots daily), it is reasonable to assume that by this same  
800  
horizon, the sectors currently paralysed by the pandemic (hotel and  
restaurant services, entertainment industry) will have returned to  
normal operations and will have resumed hiring staffs. The return to  
full employment should be fairly rapid. For Treasury Secretary Janet  
Yellen, full employment could be reached as early as 2022.  
10  
0
0
Jun-20  
CHART 2  
Sep-20  
Dec-20  
Mar-21  
SOURCE: JOHNS HOPKINS UNIVERSITY  
Along with the upturn in commodity prices (oil prices have risen  
roughly 150% over the past year, and metals are up by 60%), growing  
tensions across the US economy are fuelling inflation expectations,  
notably in the markets, where 10-year indexed swap rates have risen  
to nearly 2.5%. Consumer prices are, de facto, picking up, if for no other  
reason than heavier energy and food bills. They also signal a catching-  
the rebound in prices. Starting in April and the months thereafter, when  
statistics are compared with the depressed figures of spring 2020,  
inflation will rise well above the Fed’s 2% target, and could even reach  
3
%.  
up effect. With fewer Covid-19 cases and the easing of lockdown Yet the pick-up in inflation could be short-lived. In the United States,  
restrictions, consumers are now able to make certain purchases that as elsewhere, wages and prices remain constrained by global forces,  
they had been putting off. Household demand for travels and durable possibly even more so since the Covid crisis has accelerated the digital  
goods (automobiles, household furnishings) is strong, contributing to revolution in the services sector. They are no longer reacting as they  
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Eco Perspectives // 2 Quarter 2021  
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RETAIL INVESTORS MARGIN DEBT FOR EQUITY PURCHASES, % GDP  
 T H EA ME RI C A NRE S C UEPL A N
3
3
3
2
2
1
1
1
.8  
.4  
.0  
.6  
.2  
.8  
.4  
.0  
Although not as big as the Coronavirus Aid, Relief, and Economic Security (CARES) Act  
of 2020, the American Rescue Plan is still double the size of the American Recovery  
and Reinvestment Act of 2009 and ranks among the largest stimulus packages ever  
approved by Congress. Totalling USD 1.9 trillion, half of the plan is geared towards  
households and as a result targets demand. Several measures merit our attention.  
To help the unemployed, whose ranks have swelled by more than 4 million during  
the Covid crisis, jobless benefits will be extended through 6 September 2021 with  
a Federal contribution of USD 300 a week. In a small concession to its “whatever it  
takes” approach, the government scaled back the Federal bonus from an initial sum  
of USD 400 a week. Stimulus checks of a maximum of USD 1400 per person will be  
sent to American households for a total budget of about USD 400 billion. The child  
tax credit will be raised from USD 2000 to USD 3600 per dependent child under the  
age of 6, and to USD 3000 for each dependent child between the ages of 6 and 17.  
Although the Senate imposed some stricter income-based conditions and made the  
stimulus a little less generous, the measures cover a wide range of areas that largely  
exceed the economic victims of the pandemic.  
1
999  
2002  
2005  
2008  
2011  
2014  
2017  
2020  
CHART 3  
SOURCE: BIS  
According to estimates by the Institute on Taxation and Economic Policy, roughly  
did before to labour market slacks, a phenomenon known as the  
2
86 million men, women and children, or 86% of the US population, will receive a  
1
flattening” of the Phillips curve . Inflation was already remarkably  
stimulus check from the Treasury in the weeks ahead. This is bound to fuel debate  
on the proper calibration of government subsidies. It is worth keeping in mind that  
total disposable household income did not diminish during the crisis, but to the  
contrary increased exceptionally thanks to transfers as part of the CARES Act. With  
spending curtailed over the past year, Americans have built up enormous savings:  
USD 2,850 bn in 2020 (16% of disposable income), more than twice the amount of  
stable at around 2% during the historical decline of unemployment in  
2
010-2020, and there is little reason to believe it will accelerate over  
the long term.  
RISK OF EXCESS  
2
019 savings.  
At the 17 March monetary policy committee meeting, the FOMC  
decided not to deviate from its accommodating stance: the Fed funds  
target rate would be maintained near zero and it would continue to  
make net securities purchases at a rate of USD 120 billion a month,  
including USD 80 billion in US Treasury securities and USD 40 billion  
in agency MBS. The Fed intends to continue expanding its balance  
sheet, which already exceeds the Federal deficit and has swollen to  
USD 3,500 billion (16.5% of GDP) since the beginning of the pandemic.  
THE AMERICAN RESCUE PLAN (USD BILLION)  
HOUSEHOLDS  
910  
400  
160  
270  
80  
Direct stimulus checks  
Tax credits (children, individuals)  
Jobless benefits boost  
Useful for countering depressive shocks, monetary profligacy can  
also be a source of excess, and is not without drawbacks in the long  
term. The trillions of dollars created in counterparty to the Fed’s asset  
purchases are being recycled widely, in the emerging markets, real  
estate, infrastructure, cryptocurrencies, or stock market. Cheap access  
to liquidity encourages risk taking and leveraging, including in market  
segments where liquidity cannot always be ensured. Facilitated by the  
increase in on-line trading platforms, debt financing of stock purchases  
has hit record highs, both in absolute terms and as a share of GDP (see  
chart 3).  
Even before the Covid-19 crisis occurred, the International Monetary  
Fund (IMF) was repeatedly stressing the risk to macro-financial  
stability implied by rising leverage, especially in the corporate or non-  
bank financial sector (investment trusts and funds, etc.). Now, the  
stakes is high enough for the US Treasury Secretary to take action.  
On 31 March, Ms. Yellen decided she would reactivate the Financial  
Stability Oversight Committee’s hedge fund working group.  
Health insurance (extension of Obamacare…)  
PUBLIC SERVICES AND INSTITUTIONS  
Transfers to state and local governments  
Transfers to schools and universities  
Funding for testing and vaccination campaigns  
Other (social welfare actions…)  
COMPANIES  
763  
350  
170  
123  
120  
226  
140  
86  
Transfers to ailing sectors  
Transfers to pension systems  
TOTAL  
1900  
SOURCE: ECOFLASH N°21-05, MARCH 2021 BNP PARIBAS  
Completed on 31 March 2021  
Jean-Luc Proutat  
Jean-luc.proutat@bnpparibas.com  
1
Proutat J.L. (2018), The hypothetic return of inflation, BNP Paribas EcoFlash, September.  
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