The persistence of coronavirus and its economic impact has meant that further stimulus in the US is likely to be required to prevent the recovery fading away, QNB has said in an economic commentary.
The coronavirus pandemic has prompted governments across the globe to use fiscal measures to support their economies.
So far, the US government has spent around $3tn to spur demand and protect individuals and corporates from bankruptcy.
Negotiations in Congress on further fiscal stimulus via the ‘CARES 2 Act’ have stalled. In response, the White House issued several Executive Orders targeted at key provisions of the first CARES Act that were due to expire, QNB said.
However, Congressional deal is still required due to both practical and legal challenges associated with executive orders. For example, state and local government finances, which are already under pressure, would be squeezed further, without any additional aid.
In addition, the supplemental unemployment programme is very limited in size and faces high hurdles with regards to implementation, QNB said.
The QNB analysis covers the likelihood, timing and size of the proposed new US stimulus package.
First, QNB has assessed that the stimulus package is likely to pass because of widespread agreement on the need for additional support, despite political differences on the details.
Prolonged delays are beginning to weigh on household incomes and both state and local government spending. Therefore, if this additional stimulus package is not passed, it would threaten to interrupt the recovery that we have had so far.
Second, QNB expects an agreement in September.
The federal fiscal year ends at the end of September and the government would then partially shut down without a new spending bill.
This is likely an outcome that both sides would like to avoid, so QNB expects agreement in early September. The stimulus package has been delayed because of the current dispute in the legislative branch.
Further delays also mean that there might not be enough time for policies to impact the economy before the election, which could reduce Republican support. However, there is a risk that Democrats delay further aid until after the election, as they may wait in hope of a Biden presidency that could result in greater fiscal support.
Third, QNB expects the size of the stimulus to be around $1.5-2tn.
The Democrats are arguing for a broad based package that adds up to $2tn. On the other hand, the Republicans are arguing the recent recovery does not justify a package of that size, so they are pushing for a smaller package of $1tn.
As agreement and implementation are pushed out further, the total size of the package seems likely to increase with it.
Both parties are now in favour of stimulus checks, which alone could add $300-600bn to the total size of the package, on top of prior expectations of $1tn.
Indeed, markets seem to be expecting sizeable fiscal stimulus on the rational of the Republicans accepting a larger package to support the economy ahead of the November election.
In the meantime, the lack of a fiscal package is becoming a headwind for the US economy. Executive orders to provide $300 per week will likely not start before the end of the month and only provide half as much income support as the prior policy.
“However, once approved, the stimulus should buttress economic activity, allowing the flexibility and creativity at the core of the US economy to drive the recovery,” QNB said.
