This month’s international macroeconomic themes are as follows:
Ambitious US spending: In March 2021, the Biden administration presented the first of two packages worth over $3 trillion to boost the US economy, reduce carbon emissions and narrow economic inequality. The first package will cost around $2.25 trillion and is a huge infrastructure plan to be executed over eight years which could be financed in part through tax increases on corporations and the rich. The second major package, which could cost $1 trillion or more, to be presented later in April 2021, is to focus on social measures including expanding health care and paid-leave access and extending the child tax credit.
It is proposed that the infrastructure plan is to be funded through a corporate tax increase to 28% and a minimum 15% corporate tax, a minimum corporate tax of 21% for US companies overseas earnings and to eliminate oil and gas tax breaks.
The US currently ranks 13th globally in infrastructure quality and American Society of Civil Engineers gave America’s infrastructure a grade C-, according to the group's 2021 Report Card.
Impact: The need for the US infrastructural spending is unequivocal and it is critical that the investment enhances US competitiveness and productivity to slow the trajectory of rising debt to GDP which will otherwise structurally slow US real GDP growth.
Europe’s multi-level crisis -health, economic, and political: Europe is still firmly in the grip of the pandemic. Vaccination campaign delays which have led to a third wave of infections forcing governments to once again lockdown their respective economies. As a result, the near-term outlook for the European economy is weaker than expected six months ago. Eurozone GDP is now forecast to grow by 4.4% in 2021 (previously 5.2%).
The EU Parliament adopted the €672.5 billion Recovery and Resilience Facility to support EU countries in mitigating the economic and social consequences of the pandemic. Meanwhile, the European Central Bank (ECB) has extended the horizon for its net asset purchases under the pandemic emergency purchase programme (PEPP) to at least the end of March 2022, it also extended the duration of reinvestments of maturing securities bought under the PEPP by 12 months and introduced additional liquidity-enhancing measures while credit is so weak.
After the EU and China investment deal agreed in December 2020, relations unexpectedly and rapidly soured over increasing concerns about China's crackdown against the Muslim minority in Xinjiang resulting in tit-for-tat sanctions.
Impact: The economic growth and real long bond yield differentials between the US and EU are widening in favour of the US which is expected to result in further strengthening of the USD against the Euro.