Sobering up from post-pandemic excesses

The US bounced back rapidly from the pandemic-induced downturn and easily outpaced developed market peers during the recovery, buoyed by swift and massive policy support. GDP was firmly back on its pre-pandemic trend as early as H2 2021, whilst alternative measures of output and income such as Gross Domestic Income (GDI) point to an even stronger recovery. Nevertheless, outsized policy stimulus, along with lingering pandemic-related disruptions in the labor market, created large imbalances in the economy, stoking the highest inflation seen since the 1970s. Loose financial conditions – which predate the pandemic – gave many smaller, less successful firms a lifeline. As borrowing costs rise and financing conditions tighten in order to rein in inflation, the US economy is expected to slip into a recession in 2023, and to recover quite sluggishly in 2024. The housing market has already entered into a sharp correction phase and large declines in property prices are expected. Fiscal policy has been tightened very swiftly in 2022, both at the Federal and State level. With political division, a likely divided Congress in November and elevated inflation, we do not expect fiscal policy to support the economy much in 2023 despite the recession. An increase in corporate bankruptcies is expected, though they should remain at a moderate level at around 20,000 in 2023. Against this backdrop, the US is expected to retain one of the highest rates of medium-term GDP growth potential amongst large developed markets.

The business environment in the US is very accommodating, ranking 6th in the World Bank’s 2020 Ease of Doing Business report. The hallmarks of the economy include strict enforcement of contracts, the ease of resolving insolvencies, the rule of law in general and the relatively easy access to credit.

Politics are very divisive, while policymakers have generally become wary of not stoking inflation further through excessive stimulus. This has resulted in a scaling back of President Biden’s aggressive agenda of infrastructure and social spending. Congress finally managed to enact a watered-down version of the Build Back Better scheme during the summer of 2022. The bill plans to increase spending by over USD400bn, essentially in ‘green’ and energy infrastructure, as well as in tax credits to promote the greening of the economy. Meanwhile, projected corporate tax hikes and beefed up tax enforcement are expected to bring over USD700bn in additional revenues. However, the new measures will have little effect on the public deficit and GDP growth in the medium term since they are spread over 10 years.

Democrats hold a narrow margin in the House, but a division between moderates and progressives has effectively split them. In the Senate, Democrats and Republicans both hold 50 seats (with the Vice President as a tiebreaker) and, like in the House, there are some Democratic holdouts who can derail legislation. The mid-term elections for Congress come in November 2022 and we expect the Republicans to re-gain control of at least one of the two Chambers.