New stimulus can fuel full US GDP recovery 2 quarters sooner than previously expected, Morgan Stanley says

new york coronavirus
This outdoor space is sparsely populated as fears of the coronavirus spreading through the U.S. increase on March 04, 2020 in New York City.

  • Fresh stimulus, renewed hiring activity, and healthy inflation will usher in a full US GDP recovery two quarters sooner than previously expected, Morgan Stanley economists said in a Monday note.
  • The bank expects lawmakers to pass a new relief package in September with between $1.5 trillion and $2 trillion in fiscal aid.
  • Such a bill would lead GDP to return to pre-pandemic levels in the second quarter of 2021, the team led by Ellen Zentner wrote.
  • Still, a new stimulus package faces roadblocks as Democrats and Republicans spar over the bill’s facets and overall size.
  • Visit the Business Insider homepage for more stories.

Morgan Stanley economists raised their forecast for US gross domestic product on Monday, hinging their increasingly bullish outlook on fresh stimulus from Congress.

The bank’s policy strategists expect lawmakers to pass a new spending package in September with between $1.5 trillion and $2 trillion in new aid. The forecasted stimulus, when coupled with the faster-than-expected pace of economic recovery, can bring the country’s real GDP back to pre-pandemic levels in the second quarter of 2021.

That forecast sees a full GDP recovery taking place two quarters sooner than Morgan Stanley last expected.

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The team led by Ellen Zentner raised its 2020 GDP forecast to -3.4% from -5.3%, while the firm’s 2021 estimate gained to 6.4% from 3.4%. Fourth-quarter growth will reach -1.5% this year instead of the previous forecast of -6.2, they said.

The firm also lowered its forecast for the fourth quarter of 2021 to 5.8% from 8%, citing fiscal support expiring sooner than expected after the new bill’s September passage.

Still, such a package faces a slew of obstacles before buttressing the economic rebound. The Senate reconvened on Tuesday after failing to make progress on a new bill and taking a recess through August and September. Senate Republicans are expected to introduce a $500 billion skinny bill for renewing expanded unemployment benefits, but the bill is unlikely to garner bipartisan support.

On the other side of the aisle, Democrats have repeatedly lowered their desired bill size and recently indicated they would back a $2.2 trillion package. The proposal is still roughly $900 billion away from what Republicans are willing to support. The White House said in late August it would consider a bill with up to $1.3 trillion in aid.

Morgan Stanley expects much of the bill to focus on US households through unemployment benefits and another round of stimulus checks. The legislation is also expected to aid state and local budget shortfalls.

The team of economists also based their updated GDP forecast on a quick labor-market recovery. The August jobs report released on Friday showed the unemployment rate falling to 8.4% last month, handily beating economists’ expectations. Morgan Stanley sees the rate sliding further to 7.6% by the end of the year.

Similarly, inflation growth will improve through 2021 as demand accelerates and price disruptions driven by the pandemic fade, according to the firm. The bank expects year-over-year inflation to reach 1.6% in the fourth quarter of 2020 and 1.9% by the fourth quarter of 2021.

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