A Trillion dollars here or there
The passage of the American Rescue Plan, the suspension of EU fiscal rules until 2023, and the announcement of China’s budget for the coming year increase our conviction that global growth will be very strong over the coming year running close to 6½%, which would make it the strongest since 1984. Even so, we doubt that this will set the stage for an overheating episode. After all, it would follow a year in which global output contracted by a record amount – about 3% according to our estimates.
Consumer behavior looks to be a key swing factor. A strong rebound could become uncomfortably strong if households quickly run down the savings they have accumulated over the past year. The main discussion point is moving from fiscal policy to consumer behavior given households have accrued a large amount of ‘excess savings’: c. $1.8trn in the US (8.25% of GDP before the latest cheques), £160bn in the UK (7% of GDP), EUR 575bn in the EZ (4.75% of GDP), Yuan 2.57trn in China (2.25% of GDP) and Yen 100trn (18.5% of GDP).
If consumers spend all those savings, the risk of overheating will increase but we think that is unlikely since:
A-demand for services does not get as pent up which limits the scale of the rebound.
B-the distribution of these savings is very uneven, with most concentrated at the upper end of the income scale- according to data from the Fed and in the UK from the BoE. Richer households are better able to smooth their spending and consume less of any increase in income.