The new stimulus bill and updates on economic recovery

Author: Daniël Asselbergs
March 16, 2021

The new stimulus bill, known as the American Rescue Plan, of the United States is in the final stages and will probably be passed in the House of Representatives this week. Joe Biden’s $1.9 trillion US stimulus programme will boost the economic recovery from the coronavirus pandemic around the world. This was reported by the OECD when they upgraded their outlook for global growth. The OECD expects that the US spending package will add 1 percentage point to the world’s economic growth this year. Consequently, the global economy will grow by more than 5% this year. This is an upgrade of 1.4 percentage points from OECD’s November forecast. In Europe the boost will probably be closer to 0.5 percentage points, as the positive effects of the Biden stimulus will be partly offset by the delay in vaccination programmes, which will postpone the loosening of coronavirus restrictions and generate a longer hangover from the crisis, the OECD warned. So what are the specific details of this new bill? How did the American Rescue Plan disrupt the stock market? What are the current outlooks on economic recovery?

Specifics of the bill
Much like the previous programme, Joe Biden’s bill will include a check. Individuals earning less than $75,000 a year and married couples earning less than $150,000 will receive $1,400 per person, including children. That will get money to about 90% of households. The checks will phase out faster than previous rounds, completely cutting off individuals who earn more than $80,000 a year and married couples earning more than $160,000, regardless of how many children they have. The agreement would extend the existing $300 weekly unemployment benefit through September 6, as well as provide tax relief on up to $10,200 in unemployment benefits for households making under $150,000. The House of Representatives also wanted an increase in the minimum wage, this proposal however didn’t pass in the Senate. The Senate and House plans both extend the 15% increase in food stamp benefits through September, instead of having it expire at the end of June. The Senate bill would provide $350 billion to states, local governments, territories and tribes, the same amount as the House. $35 Billion would roughly be spent on housing aid. The child tax credit would also be raised from $2000 to $3600 per child under 6 and $3000 for kids under 18. Another $130 Billion will be spent on elementary, middle and high schools.

Effect on the stock market
The stimulus plan has contributed to a powerful shift in global equities markets. Companies considered beneficiaries of stronger economic growth, such as banks and airlines, have begun rallying, while tech stocks such as Netflix, Zoom and Amazon that performed extremely well amidst the Covid-19 crisis have pulled back in recent weeks. It has also triggered a high volume sell-off in the bond market, this is because expectations for more rapid US price growth have been sharpened. Higher inflation is bearish for bonds, since a higher discount rate influences the fixed income streams that they provide. 

Outlooks economic recovery
The OECD substantially revised its expectations for US growth this year, from 3.2 percent in its December forecasts to 6.5 percent. And investors’ expectations of inflationary pressures in other regions, for example Europe, were less likely to materialise One explanation for this would be that vaccination programmes were progressing much slower. The positive US outlook will also help mitigate the longer-term scars left by the crisis, the OECD said. Advanced economies will be close to their pre-pandemic growth path by the end of next year. Emerging economies will do less well, remaining 3 to 4 percent below their pre-virus output path by that time. This would however be a much better outcome than the OECD forecast just three months ago. To keep the recovery strong, the OECD recommended that countries should first ensure they have a robust vaccination strategy and maintain strong fiscal support to boost growth, and then shift government support into high-growth areas of the economy such as digital and green investment.

Government spending remains high and central banks keep supporting the markets. A new wave of large stimulus bills give the economy a temporary boost. Unemployment also keeps declining. The infrastructure bill is next in line for president Joe Biden to sign. The outlooks for economic growth also seem to be improving. As the OECD mentioned it might even be possible for developing countries to be back on track at the end of next year. The effect that a major budget deficit, much like the US, will have on the long term growth will remain to be seen.

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