We value the United States under a consensus AA credit rating. This rating level takes into account the country’s prosperous, competitive and diversified economy, its transparent and accountable institutional framework, and the unprecedented status of the dollar’s global reserve currency as credit strength. The latter allows the country to run budget and current account deficits with limited public debt sustainability concerns.
In the short term, the most important credit factor is the health of the country’s transparent and accountable institutional framework. While legal battles for results take place in highly competitive states, it would be credit-negative if a court decision on the outcome – if necessary to determine the next US president – is not accepted by the losing party.
Reduced growth potential and increasing debt are the biggest medium-term challenges
In the medium term, the new administration’s economic, tax and social policies and the ability to implement them alongside a potentially divided Congress are most relevant to the outlook. US creditworthiness is constrained by two main factors. First, the prospects for long-term economic growth are deteriorating.
Second, government debt is high and rising following the current government’s highly pro-cyclical fiscal policies prior to the Covid-19 shock, on top of the sizeable, albeit reasonable, fiscal stimulus this year and the federal government’s sizeable contingent liabilities from pension and health obligations.
The economic impact of the Covid-19 pandemic, which resulted in the deepest recession in post-war US history in the second quarter, is being offset by low interest rates and actions by the Federal Reserve, households and businesses in addition to a government tax package of USD 2trn (Sept. % from GDP) in direct spending and $ 860 billion (4% of GDP) in liquidity support.
As a result of these vigorous fiscal and monetary policies, the US is among the G10 countries where economies will see the smallest contraction in 2020. The change in real GDP in 2020 is estimated by the IMF to be -4.3% compared to -9.8% for the UK and France and a G10 average of -6.5%.
Troubling social outcomes limit growth potential
Still, the US’s growth potential has fallen from around 3% in the last decade to around 1.9% for the next decade. A new administration needs to adopt guidelines to increase growth by dealing with difficult social outcomes. These include a persistently high proportion of the population depending on federal programs for nutrition, health care, education and housing, the erosion of socio-economic mobility, stagnating incomes in many households and the expansion of income and wealth inequality.
These structural weaknesses are likely to constrain labor market participation, reduce human capital formation and suppress aggregate demand and future productivity growth, ultimately reducing potential output growth.
In addition, US fiscal fundamentals are deteriorating and will remain structurally weaker in the years to come. The IMF predicts that the government debt ratio will rise to 131% in 2020 and 137% by 2025, nearly 30 percentage points above 2019 levels and about 15pp above those of France and the UK.
The government’s failure to provide additional fiscal stimulus in the run-up to the November elections, due to disagreements between Democrats and Republicans over the package’s design and intended beneficiaries, shows how political polarization can make effective macroeconomic policies despite the urgency of combating the Pandemic.
In the short term, a Biden presidency would likely encounter resistance even in the legislative negotiations of a potentially divided Congress, which may hamper the timely implementation of a much-needed fiscal support package and thus reduce the overall positive economic impact of the economy.
In the long run, the deteriorating ability of US politicians to reach bipartisan political compromise casts doubt on the government’s ability to develop and implement a fiscal consolidation strategy once the economy has returned to its full potential.
Overall, the US outlook in the short term depends on its governance framework and the ability to implement effective strategies that address structural growth and fiscal challenges in the medium term.
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Alvise Lennkh is the deputy head of ratings in the sovereign and public sectors Scope Ratings GmbH.
This items was originally published on FX Empire