Warning: members of the public are being contacted by people claiming to work for AXA Investment Managers UK Limited.  Find out more information and what to do by clicking here.

Investment Institute
Macroeconomic Research

Fiscal Glitches

  • 23 November 2020 (5 min read)

Key points

  • We look at “glitches” which impair fiscal policy in the US and the Euro area. We don’t think the Republican “red line” on a quantum would constrain a decent emergency stimulus that much. How the funds would be allocated is the real issue. In Europe, we count on a “pain balance” unfavourable to Hungary and Poland to unlock the Recovery and Resilience Fund.

Exactly at the time central banks everywhere are acknowledging the centrality of fiscal policy in dealing with the economic consequences of the pandemic, governments are facing difficulties in implementing the next leg of their stimulus.

In the US, we are still waiting for Congress to design and pass an emergency package during the “lame duck” session. We don’t think the Republican “red line” at USD 500bn (2.5% of GDP) – which is probably only an initial negotiating position and may have been eased by Secretary Mnuchin’s decision to “free up” some government money by terminating guarantees to little-used Fed facilities - would not constrain that much a decent emergency package. In our computations, assuming no further “covid wave” after the current one,  extending the federal unemployment benefit schemes into the whole of 2021 would cost about USD200bn. Offsetting the estimated loss in states and municipalities’ tax receipts over 2020 and 2021 – which could force an ill-timed fiscal tightening given the prevalence of “balanced budget” rules in a lot of these entities – would cost about USD320bm. True, a more ambitious medium-term programme to spur innovation would be welcome, but it could wait. We suspect that it is not so much the quantum which is blocking the negotiations but the allocation across “red” and “blue” states.

Meanwhile, the EU’s Next Generation plan is again bogged down in the intricacies of the European institutional process. In fact, given the depth of the political implications of this package for the very nature of the EU project, we think that six months from first design as a Franco-German proposal to legislative (near) conclusion is short.  Ultimately, the resolution of the current “Hungary/Poland vs everyone else” standoff may depend on a pure “pain balance”. Even if circumventing a veto against the EU’s multi annual financial framework would be complex for the other Europeans, it is possible, while the economic – and probably geopolitical – pain for the two Eastern countries would be significant. For this reason, we remain constructive.

    Not for Retail distribution

    This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales, No: 01431068. Registered Office: 22 Bishopsgate, London, EC2N 4BQ. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries. 

    Risk Warning

    The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.