BlackRock Investment Institute

Macro insights

The outlook for U.S. growth

The successful deployment of vaccines remains the key driver of US macroeconomic dynamics in 2021. Yet several other factors will drive the macro debate as activity closes in on pre-pandemic levels. The return to pre-pandemic trend will depend in part on whether there is substantial scarring of productive capacity. Policy support remains key to bridging incomes for households and firms – especially small and medium enterprises – through the remainder of the Covid-related disruptions. Lastly, deteriorating US debt dynamics are likely to be a key macro debate in 2021, against a backdrop of very low interest rates and rising medium-term inflation risks. We see these drivers replacing the traditional business-cycle playbook.

Consensus currently expects economic activity to return to pre-Covid levels by the end of 2021. A sharper near-term hit to activity due to the need for higher levels of vaccination to combat new Covid-19 variants alongside delays in rolling out vaccines could result in potential growth downgrades. Follow our charts tracking the data here. This suggests the near-term activity hit will be sharper than anticipated, yet it does not change the overall trajectory that the cumulative activity loss will be limited. Once activity returns to pre-Covid levels, market focus will shift to assessing when, and if, growth can get back to pre-pandemic trend levels. A return to trend GDP means that the cumulative shortfall in activity caused by the Covid shock – which we see as the key driver of markets – would no longer be rising. This could take until the end of 2025 for nominal GDP, according to current consensus estimates.

The speed with which activity returns to trend crucially depends on whether there has been any substantial scarring of potential growth. Clarity on vaccines should anchor long-term expectations, limiting the extent of scarring and justifying further policy support. But the pandemic has accelerated sectoral and distributional shifts, particularly with respect to contact-intense services sectors that employ many low-skilled workers. The share of permanent job losses, which is growing over time, and the labor participation rates, yet to recover in US will be important signposts. See the chart below. On the corporate side, the shock has caused more strain for small and medium-sized firms that do not have access to bond markets and are facing tighter lending standards for bank loans. Providing a bridge through these temporary financial strains for corporates – especially as near-term virus dynamics deteriorate – is key to bringing activity back to the pre-pandemic trend.

Decline in labor participation

Labor participation

Note: Sources: BlackRock Investment Institute, with data from INE, ISTAT, FSO, INSEE, ONS, BLS and Haver, December 2020. Notes: The chart shows the change in labor participation for the respective country. The latest data is as of Q3 2020 for countries except the U.S. The latest U.S. data point is the November Employment Situation report.

This underscores the need for continued policy support. The US adopted at the end of last year a $900 billion fiscal package for Covid support, including direct payments to households and an extension to unemployment benefits. The future of the US fiscal response will be shaped by the outcome of the two Senate runoff races in Georgia. The joint fiscal-monetary policy response – and ongoing policy support – remains an important reason why we are still upbeat about risk assets in 2021 even after the solid gains posted last year.

The debt trajectory is likely to be at the center of the macro debate in 2021, given the sizeable government deficit and steep increase in the public debt levels. Even before the pandemic began, the US was one of few developed markets for which the IMF projected rising debt-to-GDP ratios over a five-year period. The trajectory has shifted even higher as a result of the pandemic. Rising debt ratios could put pressure on the Fed to keep a lid on debt-servicing costs in the context of a new policy landscape ushered in by the unprecedented coordination between the Fed and the Treasury. Similarly, the debate about rising medium-term inflation risks is likely to intensify as a rewiring of global supply chains is set to raise production costs and amid greater pricing power of large companies. See more in our 2021 Investment Outlook.

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