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Economists at Westpac believe coronavirus vaccines will eliminate downside risks for the US economy which is set to rebound strongly in 2021. What’s more, FOMC is set to maintain extraordinary support.

Key quotes

“If we look ahead a year to the end of 2021, by then the US economy should not only have recouped the remainder of 2020’s GDP loss but improved on the December 2019 level – likely by a percentage point. Annualised growth between October 2020 and December 2021 roughly twice the rate of potential should also see a further material decline in the unemployment rate – likely to around 5% – and a similar improvement in underemployment as hours worked are brought back to more normal levels.”

“By the end of 2022, US GDP is forecast to be 4ppts higher than end-2019, in effect regaining two-thirds of the gain that would have been seen had the pandemic not occurred, assuming potential growth of roughly 2% per year. At that juncture, the unemployment rate is likely to be down near 4% and underemployment back towards pre-pandemic levels.”

“To the downside, the primary concerns are around the distribution and take-up of vaccines and their longevity. As long as vaccines are taken and provide protection for six months or more, the risk of a COVID-19 resurgence should be extremely low. However, if we see disappointment on either or both fronts, uncertainty and restrictions on economic activity could persist for a protracted period.”

“One risk that seems improbable is the FOMC choosing to ratchet back their extraordinary support for the economy too soon, hampering the recovery. The structural disappointment on inflation as well as the near-term economic risks the US still faces lead us to believe that the FOMC should provide additional easing at their December 2020 meeting, as the ECB did last week, and keep forward guidance in 2021 focused on the need for an extended period of ultra-accommodative policy. Policy can always be tightened in response to an upside surprise. However, economic confidence and trust are not easily won back after successive disappointments.”