America’s bounce-back from Covid-19

All elections have implications for the wider economic outlook, but given that the US economy (around US$22trn in GDP) is the world’s largest and touches most parts of the global system, the 2020 election result has particular nuances – especially in this time of Covid-19.

“It was an eventful year; certainly with Covid, the unprecedented declines in GDP and spikes in unemployment,” reflects Deutsche Bank’s US Chief Economist Matthew Luzzetti in this last episode before 2021 of Trade Finance TV.

But, he adds, it was the huge fiscal and monetary response that was critical to the “V” shaped recovery the US has managed so far.

With Joe Biden having been confirmed as President-elect by the Electoral College vote the day before we recorded this episode, the outlook for multilateral trade is potentially one of a change in tactics, he explains. The new administration will still seek to protect American jobs and support US manufacturing, but, says Luzzetti, “We will see a ratcheting down of some of the tensions”.

As for the US dollar, he anticipates a “messaging difference” with former Federal Reserve Chair Janet Yellen in the top Treasury post – an appointment unlikely to be voted down by the Senate whatever its composition.

In short, this was a rollercoaster year, but there are grounds for optimism in 2021. Tune in and hear more insights from Matthew Luzzetti about Covid-19 responses, trade, and what we can expect from the 46th President, Joe Biden

Participant

  • Matthew Luzzetti, US Chief Economist, Deutsche Bank Research

Presenter

  • Clarissa Dann, Editorial Director, Deutsche Bank

Transcript of interview:

Clarissa Dann Good afternoon and welcome to Trade Finance TV  in lockdown. Well, Tier 2 restrictions here in the UK. I’m Clarissa Dann, your presenter, and joining me here in the studio is Matthew Luzzetti, our US chief economist in Deutsche Bank Research. Good afternoon, Matt.

Matthew Luzzetti Thanks very much for having me.

Clarissa Dann Well, it’s been a really eventful year, hasn’t it, with the pandemic and also with the US general election. We’ve just had the Electoral College vote, but there weren’t really any surprises there, where there? Given what’s looking like a Biden administration, what are your observations on how monetary and fiscal policy tools are being used to keep the economy afloat?

Matthew Luzzetti It certainly has been an eventful year, certainly with COVID-19, the unprecedented declines in GDP that we’ve seen, the spike in unemployment that we’ve seen as well. I think clearly where the most unprecedented nature of everything has been in the monetary and fiscal response, which has been critical to giving us this V-shaped recovery that we’ve had so far. So, you had fiscal policymakers which were aggressive and proactive. The Fed was aggressive and proactive as well. And I think that that was really critical to providing funds to small businesses, certainly households. And we saw an increase in income during this recession, which is a very abnormal outcome during this crisis.

Clarissa Dann And do you think this response will continue going forward with the new administration?

Matthew Luzzetti In recent months, we’ve seen gridlock overtake Washington to a certain extent. We haven’t been able to get another fiscal stimulus package passed since the CARE Act months ago. And as we speak now, there’s negotiations that are ongoing. There’s been a push and momentum towards getting a somewhat smaller bill passed, with around 750 billion dollars that include support for unemployment insurance, small businesses, but does not include support for state and local governments, which we think is a necessary thing at this moment. We have that built into the forecasts. But as we stand here today, there’s certainly some uncertainty about what gets passed not too far ahead of the holiday here.

Clarissa Dann With so much to do at home, do we think that the eye might be taken off the trade ball? We’ve got the US and China being the world’s largest economies, and we’re all wondering if multilateralism might come back after four years of a somewhat different approach. What’s your take on this?

Matthew Luzzetti Certainly there are areas where a Biden administration is going to be very different than the Trump administration. I think in terms of tactics, that is true on the trade front. But I think the overall goals will be actually quite similar. I think the political reality in the US has shifted over time. There’s now a bipartisan agreement in Washington that we need to respond to the challenges that are posed by China in the world economy. And Biden, I think will continue a pretty robust defense of American interests in many of the areas that we’ve seen under the Trump administration. The key pillars of his trade platform are to reshore American jobs, to buy American manufacturing goods, and to confront China on a number of these issues.

Where I think there is a clear difference is on the tactics; the Biden administration has pushed a multilateral approach; many of his economic advisers, including Janet Yellen, who is the nominee for the Treasury secretary, have pushed back against the use of tariffs. I think politically it is going to be difficult to get rid of those tariffs initially, but I do think we will see some within the Biden administration pushing for that. And then finally, I would just say that there is, beyond China, I think that there will be a ratcheting down on some of those tensions. And I think importantly there will be a considerable effort from the Biden administration to try to repair relationships with traditional economic allies. So some of the threats we’ve seen on global autos and things of that nature, we expect to go away.

Clarissa Dann Do you think the Biden administration will do anything different with the value of the dollar? We’re looking at possibly a weakening dollar going into 2021. What’s he going to do?

Matthew Luzzetti It’s one area where there’s just this big market consensus that the dollar is going to continue to weaken over the coming months and even certainly over the coming year, but I think that you will see a difference in the Biden administration vs Trump administration in terms of at least the messaging around the dollar. At times over the past four years, secretary Manoogian and certainly President Trump gave some mixed messages. They at times emphasized the benefits to US exporters from a weaker dollar, and that was a bit of a break from what we’ve seen traditionally where the treasury secretary would often try to support the idea that we want a strong dollar.

I think with Yellen, you will have a return to that pre-Trump view of the dollar. I think the Biden administration will try to avoid talking the dollar down to any extent. They will emphasize that is determined by market forces. And I think certainly with Yellen being schooled in international economics at the Fed, it will very much be a return to a traditional approach to thinking about the dollar.

Clarissa Dann And the other thing about Yellen is that she’s very likely to be selected anyway, isn’t she, because she was selected before for the Fed job? So there isn’t the danger of that one not working out for the Senate, is that right?

Matthew Luzzetti We think this was a really important nomination from the market perspective. There was just so much focus on this about whether or not they’re going to take a more centrist approach or a more progressive approach to economic policy. With Yellen, we think it’s a clear pivot in the centrist front, the more moderate front. And obviously, she’s a very skilled economist, very well known and renowned regulator, knows all of these issues incredibly well and I think is respected both domestically in a bipartisan perspective, but also internationally. So we think it was a fantastic nomination for Janet Yellen as Treasury Secretary.

Clarissa Dann And the last question I’m going to ask you to look into your crystal ball after an extraordinary year of massive economic shock. What do you think 2021 is going to look like? Is it just a bounce back, but with the hard stuff to come after that?

Matthew Luzzetti Yeah, I don’t know how reliable crystal balls are after experiencing the past year. I think there’s a difference in how we’re think about things in the very near term vs beyond, and in the very near term we still see some downside risk, certainly to consumer spending being driven by the return of restrictions in the US. We still are seeing record case growth for COVID-19, record hospitalizations, record mortality, and there’s some anticipation that that will only worsen over the coming weeks and perhaps over the next month. So reckoning with that and the economic implications of that are difficult.

We think that if this fiscal package gets passed, it does build a bridge to the vaccine. We’ve got great news on that front in terms of the efficacy, also in terms of the distribution and the rollout and the timeline. So there we do expect it to boost economic activity beginning in Q2. You could possibly get three quarters of the US population vaccinated by the middle of the year and we actually expect rates to be down to 5% by the end of next year. I think this is by no means a healed economy by the end of next year, but it is near the best case scenario that we could have, at least from an economic perspective that we could have hoped for just a few months ago.

Clarissa Dann Well, thanks for that closing message with some good news in it. And it’s been great to have you here in the studio and all the best for the festive season.

Matthew Luzzetti Thanks so much. You, too.

Clarissa Dann I’d like to thank Matthew Luzzetti for his insights here in the studio today, and, of course I’d like to thank all of you for watching. To see further episodes of Trade Finance TV, some of which are in lockdown, do visit TRADEFINANCETV.NET.

And last but not least, I wish you all the very best for the forthcoming holiday season and we all look forward to a more positive 2021.

Published on December 17, 2020

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