One way to see the major economies and the progress they have made towards normalization is to look at three things. One, the quality of economic reform in these areas; Two, the persistence of their expansionist policies or otherwise; And three, recent transition wave-rich efforts.
United States of america
The first fiscal stimulus package in the US was $ 2 trillion, of which $ 1.20 trillion was to be paid in cash to those who were eligible for aid. The second and additional fiscal stimulus that has been set up by Biden is to the tune of $ 1.90 trillion. This is something that the market is eagerly waiting for. Both these packages together and the direct cash that has been received to the deserving public is a fairly large amount which is capable of helping the demand grow in the coming months.
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Biden has unveiled a new infrastructure plan, again amounting to $ 2 trillion. This money is going into large-scale investment in roadways, railways and bridges, with a focus on clean energy. The plan will also focus on the quality of life in the home – homes, school buildings, underground water infrastructure and broadband expansion.
The third aspect of the plan is the improvement of conditions for the elderly and caregivers of people with disabilities. It would expand a Medicaid program to provide more services and eliminate a backlog that prevents thousands from having Medicare. Fourth, research, development and manufacturing – about 300 billion dollars will be invested in the manufacturing sector in the plan, which includes domestic production of technologies and support of critical goods. About $ 50 billion will go towards semiconductor manufacturing and research.
These massive expenditures are about to drive the American economy into a new era of growth and growing demand, employment, and production. The government will collect higher corporate taxes – it is likely to be revised from 21 percent to 28 percent – and use the same for these projects. As far as counter cyclical policies are concerned, there is a clear accent on the demand side, and they are increasingly more likely to bear fruit. Economic growth is expected to accelerate further, and the same is happening in the markets.
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Higher growth will come with some amount of inflation. Bond yields have been an issue with the financial markets, although something has reversed in recent times. Bond yields in other developed markets also increased. This increase comes from expectations of rising inflation, which many believe will be a cause for concern. This is despite the fact that the Federal Reserve has time and again reaffirmed its commitment to a transformative policy and provision of adequate liquidity until development becomes sustainable.
But the central issue is the possibility of high inflation as the economic growth momentum. Fed Chairman Jerome Powell recently said that growth could bring rising inflation with it, but he did not expect it to last long. But with many market participants estimating that the price level is starting to rise, the Fed may start combating inflation with rate hikes.
The US Treasury 10-year benchmark, which had gone above the 1.70 percent level, is currently far below 1.60 percent. A gradual move is likely at levels above 2 percent in the next two quarters. The US, under its new administration, has set a definite program for mass vaccination and other prevention initiatives.
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While China and Russia continue to have a tough posture, negotiations are underway with Iran to reopen nuclear discussions. There is some amount of optimism around these discussions. If they conclude on a positive note it would be beneficial for the Middle East as well as American policy as it cries war and commits possible violence. The US dollar is likely to maintain its strength against all currency majors in the coming months, and this will be to a certain extent due to asset movements in the US dollar in the near future.
On the jobs front too, the US presents a favorable picture. GDP forecasts put the US growth rate above the 6 percent mark of 2021 and close to 5.50 percent for 2022.
The UK has gone through stringent restrictions earlier this year due to the widespread resurgence of the epidemic. The numbers for January-February indicate a month-on-month decline of 2.90 percent. The economic outlook is strengthened with an aggressive vaccination program that outstrips the US and Europe as well. Manufacturing PMI improved to 57.90 and PMI increased to 56.80 for March. The UK budget provides GBP 65 billion as additional support for economic revival. But many people are not happy about the corporate tax hike, although it will happen gradually. The Bank of England is likely to continue its soft money policy until growth returns to the ground.
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The eurozone is going through a difficult time as it has not been able to contain the second and third wave of the epidemic and its vaccination program is also in a shambles. These are factors that will affect economic performance in the coming quarters.
The ECB, on its part, has been consistently following an easy money policy, and there may not be any reversion from that stance at any time in the near future. It has also expressed a strong dislike for the rising bond yields. The liquidity enhancement programme of the ECB, which is equivalent to 1.85 trillion euros, continues to support the economy and the markets. The programme of purchase of securities is likely to be enhanced from 60 billion euros to 100 billion euros per month to intensify the ECB’s involvement in the recovery process and adequately oil the wheels of the economy, especially in view of the fact that both consumption spending and investment spending are lagging in the Eurozone, the two things which are at the centre of the recovery process.
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A slowdown in growth is forecast for the Eurozone for the coming two quarters, with the March PMI for manufacturing at 62.40 and services at 48.80. The Eurozone may see a recovery at a much later stage compared to the US or UK.