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How the US is helping the UK economy recover faster than expected

Here’s how the $1.9 trn US stimulus package being injected into the US economy this month could benefit UK investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The colossal $1.9 trn stimulus package was approved by the United States Congress earlier this month. This injection of money into the US economy won’t only have positive implications for the US, but is likely for the rest of the world too including the UK.

The US stimulus package has numerous measures, such as investment in renewable energy and raising child tax credits. But most notably it included a $1,400 cash payment for most Americans. By 17 March the Internal Revenue Service said it had so far made approximately 90m payments worth $242 bn.

Individual eligibility for “stimulus checks” depends on tax status and income, and it tapers away sharply for richer taxpayers. But President Biden has said that 85% of American households will receive payments. Some households with moderate incomes and large numbers of dependents will receive thousands of dollars each.

This major stimulus package has the potential to benefit investors, including UK investors, in two ways.

Boost to global growth

First, by lifting demand for goods and services across the world. The Paris-based OECD (Organisation for Economic Co-operation and Development) last week upgraded its estimate for world GDP growth in 2021 by 1% to 5.6%. It said: “Vaccine rollout, although uneven, is gaining momentum and government stimulus, particularly in the United States, is likely to provide a major boost to economic activity.”

Later in the week, the Bank of England joined in. Alongside its decision to hold interest rates at 0.1%, it said that since February, “developments in global GDP growth have been a little stronger than anticipated, and the substantial new US fiscal stimulus package should provide significant additional support to the outlook.”

This chimes with the OECD’s analysis, which raised its forecast for UK growth to 5.1% for this year and 4.7% in 2022 – up from its December estimates of 4.2% and 4.1% respectively.

There is an argument that the Chancellor Rishi Sunak was too downbeat about the outlook for the British economy in the Budget. He has to base his tax numbers on the forecasts for the economy from the Office of Budget Responsibility (OBR). The OBR completed its work in February before the US stimulus was approved. It said it is predicting only 4% growth in the UK this year, though an acceleration next year.

The OBR has already had to admit its outlook for the public finances was too pessimistic. When the latest official government deficit numbers were published two weeks after the Budget, the OBR said that despite a record £19.1 bn borrowing in February, the overall number for the fiscal year ending in April now “looks set to undershoot our latest estimate” for the year.

Increased pools of investment

The second benefit investors could see from the US stimulus package will likely be through the stock market.

A poll of more than 400 citizens with brokerage accounts by Deutsche Bank found that the growing number of American retail investors plan to invest substantial amounts of the stimulus cash. Investors in the 25-34 age group plan to invest 50% of their payments.

It’s also been estimated that retail investors are likely to buy up to $3 bn worth of equities on the stock market once the stimulus cheques land.

If the outlook for the world economy is so positive, how come stock markets, especially in the US, have been so volatile in the last month? The S&P 500, the widest US share index, hit a record high on Wednesday 17 March before dropping on the Thursday and Friday.

The answer could be that investors are starting to worry that a rapid recovery could bring inflation.

In fact, the US Federal Reserve raised its inflation forecast from 1.8% to 2.4%. These worries have found their way into the bond market. The 10-year yield on US Treasuries have hit 1.75%, their highest since before the pandemic.

However, a prolonged rise in inflation is very unlikely. Unlike in the 1970s, there is no shortage of commodities like oil, natural gas, metals, or foodstuffs. Additionally, technological advances in, say, retail distribution, continue to bear down on prices.

Another source of inflation can be employees demanding pay rises. But with unemployment on the rise in the wake of the pandemic, that is not likely to gather steam any time soon.

In addition to the stimulus package, another benefit to both the UK and US economies is the success of their vaccine roll outs relative to other parts of the world, including the EU. The Financial Times’ daily vaccine tracker showed by 22 March the UK had given a first dose to 40.5 people per 100 residents and the US 34.1 per 100. The EU by contrast had delivered only 12 first doses per 100 residents.

No wonder that the latest survey of consumer sentiment in the UK shows it is recovering fast on the prospect on the easing of lockdown restrictions. The overall index rose 7 points in March. The balance of people expecting an improvement in their personal financial situation over the next 12 months also rose to plus 10 percentage points, the highest level for three years. This is probably explained by record household savings over the last year.

It always used to be said that whenever America sneezes, the British economy catches a cold. The opposite is also true, and we seem to be helping each other to recover from the pandemic.

This article is not personal advice. If you are unsure whether an investment is right for you seek advice. Past performance is not a guide to the future. All investments can fall as well as rise in value so you could get back less than you invest.

George Trefgarne is CEO of Boscobel & Partners, a political consultancy. Hargreaves Lansdown may not share the views of the author.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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