The past couple of weeks have seen cuts to growth forecasts for the EU and the U.K. The natural question then is why, and who could be next?
Regarding Europe, the main culprit is the COVID-19 crisis. Granted, people have learned to live in a shutdown world, with work from home and remote shopping, so the impact of lockdowns should be smaller. However, the new strain of the virus is more contagious, leading to longer and larger lockdowns.
As it pertains to the U.S., there is an argument to be made that “bad news is good news.” By this we mean that bad news on COVID-19 and the economy could help motivate bigger and earlier stimulus package action than would otherwise be the case, especially with Democratic control of the Senate.
2020 was an unprecedented year and made markets numb on many fronts, including fiscal spending. Case in point, the latest $900 billion package is materially less than what was being discussed prior to the election but is still massively large, as it amounts to roughly 4.3% of GDP. While the next package is likely to be less front-loaded, it should still be materially large — reports suggest President-elect Joe Biden plans to seek around $2 trillion — and further help inoculate the U.S. economy from COVID-19 shocks.
Of course, there are major risks both to the upside and the downside. The key downside risk is a much weaker first quarter if the new COVID-19 strain causes an even bigger surge before the vulnerable population is vaccinated, as is happening in the U.K. Conversely, upside risks come from a larger than expected surge in growth later this year as reopening unlocks accumulated savings from past fiscal packages. | |
| HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: | |
- U.S. initial jobless claims disappointed the markets, as they came in at 965,000 versus expectations for a 789,000 print. This week’s increase was the biggest jump since March. Continuing claims also disappointed, as they rose to 5.27 million from 5.1 million, versus consensus estimates for a small decline.
- The U.S. House of Representatives voted to impeach President Donald Trump by a vote of 232–197, as all Democrats and 10 Republicans voted in favor. The process now moves to the Senate for a trial, but the timing is uncertain. The Senate is in recess until Jan. 19. Senate Majority Leader Mitch McConnell said that he will not call senators back early for an emergency session and is undecided on how he would vote.
- President-elect Biden is expected to announce plans for the next round of fiscal stimulus today, with expectations for Biden to seek a bipartisan solution.
- The risk for snap elections in Italy has risen materially after Italia Viva announced it will quit the ruling coalition. The current prime minister will likely be given a chance to form a new coalition. Should he fail, someone else from his party will be given a chance. If this fails, a caretaker government will likely be the final effort. If this also fails, then fresh elections will be needed.
- China named Vice Minister Yu as the ministry’s top trade negotiator. This post has been vacant for two years.
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