'Democratic sweep best for US economy revival'

Democratic sweep best for US economy revival, say economists

The result of the November 3 US presidential election, if available promptly, could swiftly end the gridlock on a second fiscal stimulus bill

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The outlook for the US economy has dimmed in the run-up to the presidential election, according to a Reuters poll which showed that a recent resurgence in novel coronavirus cases ran a high risk of halting the economic recovery.

New coronavirus infections have touched record levels in the United States recently, and the number of hospitalised Covid-19 Americans jumped to a two-month high, leading to further restrictions. In Europe, many countries have also reimposed measures to curb the disease's spread.

A fast-rising case count and uncertainty about a fiscal relief bill drove the steepest US stock market sell-off in a month, with the benchmark S&P 500 index posting its biggest daily decline in four weeks on Monday, flattening the US Treasury yield curve.

Nearly two-thirds of 58 economists who responded to an additional question in the October 16-26 poll said there was a high risk that the US economic rebound could be halted by the surge in coronavirus cases, including five who said it was very high.

"The pace of the recovery is already slowing as households and businesses are struggling with the impact of the lockdown and the virus," said Philip Marey, senior US strategist at Rabobank. "Meanwhile, the extension of the fiscal stimulus has yet to arrive, is late, and is likely to be modest."

The result of the November 3 US presidential election, if available promptly, could swiftly end the gridlock on a second fiscal stimulus bill.

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"The outcome of the election will likely dictate the trajectory for additional stimulus," noted Michelle Meyer, head of US economics for Bank of America Securities.

"A clear victory could accelerate stimulus negotiations. In the event of a contested election, the political environment creates a challenge for additional stimulus."

Democratic control of the Senate, along with a win for the party's presidential candidate Joe Biden, was predicted to yield a stronger near-term economic recovery, according to nearly 75 per cent of 59 analysts who responded to an additional question.

"Opinion polls suggest a growing likelihood of a Democrat clean sweep, which could pave the way for a massive fiscal stimulus in early 2021, focusing on income support and front-loaded energy infrastructure investment projects," said James Knightley, chief international economist at ING.

But one of the biggest economic worries accruing from the pandemic is high unemployment. Over 80 per cent, or 41 of 49 respondents, said the US jobless rate would not return to pre-Covid-19 levels until 2023 at least, including two respondents who said it never would.

The wider poll showed the jobless rate averaging 8.3 per cent this year, 6.8 per cent next and 5.5 per cent in 2022. It was 3.5 per cent earlier this year before the pandemic took hold.

The economy contracted in the second quarter at an annualised 31.4 per cent pace, its sharpest decline in at least 73 years. It is forecast to grow four per cent this quarter after an expected record rebound of 31 per cent last quarter.

But growth is now forecast to slow further during each quarter next year, and much more than predicted last month.

For this year, the world's largest economy is forecast to shrink 4 per cent, according to the poll of 120 economists.

The consensus for 2021 and 2022 was for 3.7 per cent and 2.9 per cent growth, respectively.

Roughly two-thirds of respondents, or 41 of 62, said their forecasts were based on another round of fiscal stimulus.

Of the economists who expect more stimulus, the median was $1.8 trillion, within a $0.5-$3.5 trillion range.

"If markets sell off violently and the economic data deteriorate, we could see Washington facilitate the passage of stimulus even in a highly contentious environment," added BofA's Meyer.