By Byron Shoulton, Chief Economist, Foreign Credit Insurance Association (FCIA)
The 2020 U.S. elections are over and all indications are that Joe Biden, the Democratic Party’s nominee will be the next U.S. President; while control of the Senate could remain in the hands of Republicans which also gained seats in the House of Representatives. Because of the razor thin margin of victory, the election results remain subject to recounts in four states where voting tallies were less than one percentage point between both candidates. Two senate seats in the State of Georgia will face reruns. Meanwhile, the Trump campaign has filed lawsuits challenging the process of vote counting in certain states. It is doubtful if any of the legal challenges or vote recounts will change the ultimate result. At the time of this writing President Trump had not conceded defeat.
To govern effectively, President-elect Biden will need to reach across the aisle to find common ground. This will be particularly important in reaching a consensus with congress on the size and nature of an expected economic stimulus package, which markets are anticipating. The U.S. economy (like most of the global economy) remains in recession, beset by the effects of Covid-19 pandemic. Overcoming the pandemic is priority number one. Markets are looking to government (aided by the private sector) to provide the needed boost to create and sustain a recovery over the next few years.
The U.S. economy continues to show signs of a gradual rebound: half of twelve million jobs lost at the peak of the pandemic have been replaced; and the unemployment rate which reached a high of 14% in March-April, was down at 6.9% at the end of October. A total of 638,000 new jobs were added in October, the sixth consecutive monthly gain. Overall, the labor market is recovering more strongly than expected. Still, the rate of job growth has slowed each month since June.
The signs of a U.S. turnaround: a pick-up in the housing market, manufacturing, car sales and home remodeling, have helped boost investor sentiment and improve consumer outlook. The upcoming holiday season will likely stimulate retail spending; but the recent uptick in Covid-19 cases and a lack of an agreement on additional economic stimulus, continue to act as a damper on broader economic activity. Also, the pick-up in housing, construction, auto sales, etc. are occurring even as hospitality, leisure, travel, tourism, hotels, restaurants, airlines, sports franchises, bars, etc., continue to suffer steep losses and some closures caused by continued lockdowns and the recent spike in Covid-19 cases occurring around the country.
The Federal Reserve may well be the main tool to steer the U.S. economy in the year ahead. The Fed’s Open Market Committee voted in early November to maintain its current stance, holding its key policy interest rate at zero and continuing its purchases of $120 billion of securities each month. The Fed reiterated the need for further fiscal action to sustain the real economy. It stressed that the ongoing health crisis will continue to weigh on economic activity, employment, and inflation in the short-term; and underlined that the pandemic posed considerable risks to the economic outlook over the medium term.
The prospect of a split government in the U.S. next year was greeted bullishly by stock and bond markets. Global financial markets have been buoyed by the election results in the U.S. and by news of a developing vaccine with a 90% effective rate in preventing Covid-19 infections. Production and the effective distribution of such a drug over the next few years is central to stabilizing the global economic situation; and will be pivotal in restoring global confidence needed to pursue a sustainable recovery.
Oil prices have edged higher and government bond prices are down, pushing yields to the highest levels in months – reflecting growing optimism among investors on the outlook for economic growth. Despite the ongoing pandemic, it has been several months since there has been this high a level of optimism across global financial markets. While the recovery will take time, expectations of an uptick in spending, demand and consumption in the U.S., Asia, Europe and LATAM over the coming months are beginning to look more positive.
In Europe, fresh Covid-19 spikes have also led to renewed lockdown measures being selectively reintroduced across the region. The effect has been fresh doubts about the speed of reopening the economies and concerns over whether a sustained eurozone economic recovery will be forthcoming in the first-half of 2021.
The World Trade Organization has authorized the European Union to apply additional tariffs on almost $4 billion of U.S. goods. The EU will hit U.S. products ranging from sugarcane molasses to spirits with punitive tariffs in the transatlantic row over aircraft subsidies. The EU trade Commissioner has explained that it will use its World Trade Organization retaliation rights that it was rewarded to target these U.S. exports to Europe with additional duties. The measures take immediate effect. The WTO awards were the fruit of a 16-year legal battle over U.S. state subsidies to Boeing the aircraft builder. The U.S. has had extra duties in place against $7.5 billion of European products since 2019 in a parallel complaint against EU aid provided to Airbus.
With Covid-19 cases increasing over the past month the German government enacted a one-month partial lockdown that closed the hospitality and leisure sectors during November. This could bring the economy into recession again, especially as momentum had been weakening since September. The divergence between the fortunes of the manufacturing and service sectors will be reinforced going forward, as restaurants and some retail will be closed but industrial production will continue.
German industrial production accounts for 23% of gross value added, so the sector remaining open does have the potential to support growth, especially as China – an important trading partner – is rebounding strongly from the pandemic. However, the German manufacturing sector was in a fragile state ahead of the pandemic and the outlook for the global economy remains subdued. The November lockdown will be accompanied by extraordinary government aid, which will cover 75% of the revenue from November 2019 for smaller companies with fewer than 50 workers. Nonetheless, the risk of further increases in unemployment and in insolvencies has risen.
The projection is for German growth to stall at a quarterly pace of zero percent in October- December. For all of 2020 the economic contraction is projected at 5.5%. The 2021 growth is projected at 4.6% but could be revised down.
The UK-EU Brexit negotiations which has a December deadline has limped along with limited signs of success. Nonetheless, both sides say a deal is possible.