A split US government can be good for growth
By Generali Investments’ Research Team
Even without the control of the Congress, the new administration can implement pro-growth policies. President Biden may still find a compromise with the Republican controlled Senate on a USD 1 trillion fiscal package, including funding for small business and tax cuts for low to middle incomes; we expect the deal to be finalised by Q1 next year, but an earlier compromise on a smaller package is not impossible. In the longer term, industrial policies to confront China on IT and renewables may be another area of cooperation. A bipartisan deal on infrastructure investment may come to the fore again, but disagreement on the priorities and funding are big roadblocks.
The lower than expected fiscal boost and the still uncertain short-term economic outlook, as virus cases are rising fast, imply that the Fed keeps a big responsibility in maintaining easy financial conditions. Yet its effective contribution to growth is more uncertain. A moderate fiscal stimulus and a reduced political risk premium – alongside mounting vaccine hopes – should allow for a further yield curve steepening and support the rotation to more cyclical risk assets. Easing uncertainties in trade policies and persistent Fed accommodation point to moderate further USD weakness.
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