by Xinhua writer Liu Yanan
NEW YORK, March 11 (Xinhua) -- The new stimulus package worth 1.9 trillion U.S. dollars signed into law by U.S. President Joe Biden on Thursday could not only heat up economic expansion and inflation, but also reverse international capital flows, according to experts.
U.S. real GDP will grow at over 7.5 percent in 2021 by using a fairly conservative assumption regarding the size of the fiscal multiplier, said Prajakta Bhide, U.S. economy and policy strategist with MRB Partners, a New York-based private research firm, on Thursday.
The 1.9-trillion-dollar fiscal deal plus the 900-billion-dollar fiscal aid passed at the end of 2020 would amount to a stimulus of over 12.5 percent of GDP this year, noted Bhide.
"We currently forecast 6.4 percent of U.S. GDP growth in 2021 and 6.0 percent in 2022," said Brian Rose, senior economist at UBS Global Wealth Management, on Tuesday.
By contrast, at the end of 2020, UBS once forecast in its annual outlook that the U.S. economy would expand 3.6 percent in 2021, up from negative 3.5 percent last year.
HIGHER YIELDS TRIGGER SHAKEUP
Still, the recent substantial rise of U.S. 10-year Treasury yields amid a brighter economic outlook and high inflation expectations has prompted rotation and divergence in both domestic and foreign stock markets.
The return of long-term interest rates on U.S. government bonds to around 1.5 percent at the end of February has triggered a round of repairing across financial markets, said an economic outlook report issued by the Organization for Economic Co-operation and Development (OECD) on Tuesday.
The tech-heavy Nasdaq index recently fell into correction territory while Dow Jones Industrial Average index benefited from a strong recovery momentum.
Recent moves in bond yields have triggered decade-high levels of stock rotation in Europe with European value stocks outperforming growth by 18 percent in the last six weeks, said a research note by Bank of America (BoA) Global Research on Tuesday.
When Asian stocks started 2021 with higher volatility and greater sensitivity to U.S.-led sell-offs, the Nikkei index had a deeper decline than the S&P 500 index from highs in February due to its high weight in underperforming sectors and low weight in rallying sectors, said BoA Global Research.
The OECD warned that rising U.S. bond yields could trigger a reversal of capital flows and higher currency volatility as experienced during the "taper tantrum" in 2013.
"Judging by the recent strength of the dollar, it appears that Treasury yields are already high enough to attract capital from overseas," Rose told Xinhua.
The U.S. dollar is expected to gradually strengthen in 2021 against the backdrop of U.S. economic outperformance and the eventual Fed policy normalization, said BoA Global Research.
The U.S. dollar index fell below to 90 points in early January from around 100 points in last May due to the COVID-19 pandemic, influx of liquidity and historically low interest rates in the United States.
"Re-pricing of rates on diverging economic prospects is a key source of U.S. dollar support. We expect it to continue as Fed policy normalization is being priced," said Ben Randol, strategist with BoA Securities, recently.
The U.S. 10-year Treasury bond yield would reach 1.75 percent by the end of 2021, up from closing of 1.538 percent on Thursday, according to BoA Global Research.
INFLATION MAY BE SHORT-LIVED
However, concerns over runaway inflation may be overblown as the spike of inflation in the early stage of recovery is expected to be transient.
Rose expected most of the new stimulus money would be spent or used to pay down debt, while a relatively small part of the 1.9 trillion dollars is likely to go into risk assets.
Overall inflation in the United States would remain moderate, but prices for some services could rise sharply if pent-up demand emerges as the economy reopens, Rose said.
The growth effects of the forthcoming stimulus alone are not sufficient to cause a sustained shift into a high-inflation regime, said Bhide, who sees 4 percent inflation as "high."
"A one-to-two-year surge of above-potential fiscal stimulus-induced growth would likely cause only a temporary rise in inflation," Bhide told Xinhua.
"We expect the Fed is hoping for inflation to go above 2 percent for some period of time, and is therefore unlikely to suddenly tighten policy," said Rose.
Fed Chairman Jerome Powell recently said the inflation spike in the coming months would likely be temporary and the central bank will be patient in waiting for inflation to exceed 2 percent.
It would take a period of sustained rapid government spending growth, with no offsetting pullback from monetary policy, to generate a prolonged higher inflation, according to Bhide.
However, Bhide warned that U.S. inflation could rise rapidly and be more sustained through self-fulfilling increases in future inflation amid high inflation expectations or through a multi-year phase of expansionary fiscal policy under the Biden administration.
The Democrats want to enter the midterm campaign cycle on a strong economic footing and could well emerge with a stronger mandate to boost fiscal spending after the elections, said Bhide.
It will take considerable efforts to bring government finances back onto a sustainable path for the long run, but interest payments on the debt are manageable for now, Rose said.
"We expect Democrats to use budget reconciliation to enact tax hikes in late 2021. The budget deficit should be much smaller in 2022 and 2023," the economist said.