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US economy can hit pre-virus level in Q3'21 with $1 trillion stimulus – S&P

The U.S. economy could regain its pre-pandemic level by the third quarter of 2021 if a new coronavirus relief package worth $1 trillion slightly larger than a bipartisan compromise proposal being considered is in place at the start of the year, S&P Global Ratings said.

Ratings expects U.S. real GDP to rebound 4.2% in 2021 following an estimated 3.9% contraction in 2020 if Congress passes and the president signs a $1 trillion in economic stimulus that is divided equally across tax rebates, extended unemployment insurance, support to small businesses, and aid to state and local governments.

"First-quarter 2021 would show the biggest bang for the buck, as we assume households would receive their tax rebate checks in this quarter, and literature suggests they tend to spend nearly 40% of the money received in this quarter," the rating agency wrote in a Dec. 15 report.

The weighted average impact of the stimulus would be $770 billion through 2023, boosting economic growth over the three-year period by 2.5 percentage points, the rating agency added.

Ratings published its report as top Republicans and Democrats in Congress remain in stalemate in their stimulus talks. On Dec. 14, a bipartisan group of lawmakers revealed more details about a proposed two-part, $908 billion relief package, which includes a $300 billion boost to the Paycheck Protection Program, $160 billion in aid to state and local governments, and a $300-per-week unemployment benefit for Americans.

It remains unclear whether the White House and Democratic and Republic congressional leaders would back the bipartisan proposal in its current size and scope. Ratings said a no-stimulus scenario would shrink the economy by 1.5 percentage points and delay its recovery to pre-pandemic level to the first quarter of 2022.

"Moreover, indecision among policymakers will influence private-sector expectations and spending plans. Households, for example, may delay spending on worries that the modest recovery may collapse," the rating agency said.

If Congress passes a larger stimulus worth $1.5 trillion, the economy could hit its pre-pandemic level sooner, in the second quarter of 2021, and lead to a stronger full-year GDP growth of about 5% in 2021, the rating agency added.

In its report, Ratings also called for other fiscal policies such as investments in infrastructure, public health and education, saying temporary, short-term stimulus measures would only fill the demand hole and not lead the economy to a "higher sustainable growth path."

"Public infrastructure investments lift medium- to long-term productivity and growth prospects and put money, jobs, and tax revenue back into the economy for years, if not decades," Ratings said.