Fiscal stimulus and vaccinations dominate global discussions

One way of looking at the major economies and the progress they have made towards normalisation is to look at three things. One, the quality of the economic recovery in these territories; two, the persistence or otherwise of their expansionary policies; and three, the current efforts at containing the recent wave of infections.

United States

The first fiscal stimulus package in the US was to the tune of $2 trillion, of which $1.20 trillion was to be direct cash payments to people who qualified for the aid. The second and additional fiscal stimulus instituted by Joe Biden is to the tune of $1.90 trillion. This is something the markets have been eagerly waiting for. These two packages together and the direct cash that the eligible public got is quite a large amount of money capable of helping demand rise over the coming months.

Biden has unveiled a new infrastructure plan, which again amounts to $2 trillion. This money is going into massive investments in roadways, railways, and bridges with a focus on clean energy. The plan will also focus on the quality of life at home — building homes, school buildings, underground water infrastructure and broadband expansion.

The third aspect of the plan is improving conditions for caregivers for elderly and people with disabilities. It will expand a Medicaid program to make more services available and eliminate a backlog that prevents thousands from getting medicare. Fourth, Research, development, and manufacturing — about $300 billion in the plan would be invested in manufacturing, including support for domestic production of technologies and critical goods. Around $50 billion would go toward semiconductor manufacturing and research.

These massive spends are going to take the US economy to a new era of growth and rising demand, employment, and output. The government will collect higher corporate taxes — it is likely to be revised upwards from 21 per cent to 28 per cent — and utilise the same for these projects. There is a clear accent on the demand side as far as counter cyclical policies are concerned, and they are more likely to bear fruit faster. Economic growth is expected to accelerate further, and this is what is getting reflected in the markets, too.

Higher growth will come with some amount of inflation. Rising bond yields have been an issue with financial markets, though there has been some reversal in the recent past. Bond yields in other developed markets, too, moved up. This rise has been occasioned by rising inflationary expectations, which many believe would be a cause for worry. This is despite the fact that the Federal Reserve has time and again reaffirmed its commitment to an accommodative policy and provision of sufficient liquidity, till growth becomes sustainable.

But the central issue is the likelihood of higher inflation as economic growth gathers pace. Fed Chair Jerome Powell recently said that growth may bring with it rising inflation, but he did not expect it to last long. But the assessment of many market participants is that the moment price levels start surging, the Fed could start combating inflation with rate hikes.

The US treasury 10-year benchmark, which had moved up above the 1.70 per cent level, is currently much lower at 1.60 per cent. A gradual move to a level above 2 per cent is likely over the next two quarters. The US, under its new administration, has put in place a definitive programme for massive vaccination and also other containment initiatives.

While the tough posture towards China and Russia continues, there are negotiations under way to re-open nuclear discussions with Iran. There is some amount of optimism around these discussions. If they conclude on a positive note it will be beneficial to the Middle East as also US policy as it unwinds war cries and potential violence. The US Dollar is likely to maintain its undertone of strength in the coming months against all currency majors, and this would be to a certain extent due to asset movements into the US Dollar in the near future.

On the jobs front, too, the US presents a favourable picture. GDP forecasts put the US growth rate a shade above the 6 per cent mark for 2021, and close to 5.50 per cent for 2022.

United Kingdom

The UK has gone through tough restrictions earlier this year due to the widespread resurgence of the pandemic. The numbers for January-February indicate a month-on-month decline to the tune of 2.90 percent. The economic outlook looks robust with an aggressive vaccination programme that surpasses even the US and Europe. The manufacturing PMI improved to 57.90 and the services PMI rose to 56.80 for March. The UK budget has a provision for GBP 65 billion as additional support for the economic revival. But not many are happy about the corporate tax hike, though this will be gradual. The Bank of England is likely to continue with its soft money policy till enduring growth reappears on the ground.


The Eurozone is passing through a difficult time as it has not been able to contain the second and third wave of the pandemic, and its vaccination programme is also in a shambles. It is these factors that would pull down 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.

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.

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