During the 1980s, the US lived through Reaganomics, an economic philosophy rooted in a steadfast belief in deregulation, lower taxes on businesses and the wealthy, and less federal government spending. Now, as America starts to emerge from the pandemic, we’re seeing its almost-exact opposite on the ascent: Bidenomics.
The term refers to President Joe Biden’s economic agenda, which is driving large-scale progressive reforms the likes of which the US hasn’t seen since Lyndon Johnson’s Great Society in 1964. President Biden’s aim is nothing less than a complete transformation of welfare benefits, education, trade and industrial policy, and housing, alongside big spending on infrastructure and the environment.
This reform programme could set the pace for progressive economic movements worldwide. In Southern Europe, Italy, Greece and Spain are once again running big budget deficits and planning to splash government spending to revive their economies. Emerging market governments, like South Africa’s, may be tempted to follow suit.
Of course, the pendulum will swing back to fiscal conservatism should a Republican president retake the helm, but for now, Biden has the opportunity to reshape the US economy and tackle the problems of his age. If he succeeds, he could leave a legacy that rivals Roosevelt’s New Deal, which transformed American society for the better. Irrespective, funding the repayment of the massive deficits will be the problem for future presidents.
“The huge risk is that these investments won’t increase the country’s ability to grow, which means that they will only stimulate GDP for a few years. The effect of the higher demand will then go down, growth will be low again but debt will be much higher.”
– Lorenzo Codogno, a London-based consultant and former economist at Italy’s Treasury
“Should investors worry about the mass money printing by central banks? Certainly. It has distorted financial markets and inflated prices across asset classes. But perhaps this simply leads to lower future returns rather than higher inflation.”
– Nicolas Rabener, CAIA, Founder of Factor Research
Global News
- Robert Reich, a former US secretary of labour and current professor of public policy at the University of California at Berkeley, argues that Reaganomics is officially dead. He says that “for years, conservative economists argued that tax cuts for the rich create job-creating investments, while assistance to the poor creates dependency. Rubbish. Bidenomics is exactly the reverse: give cash to the bottom two-thirds and their purchasing power will drive growth for everyone. This is far more plausible. We’ll learn how much in coming months.”
- Despite the polarisation of the US political landscape, research suggests that most Americans — including Republican voters — support Bidenomics. A new Reuters poll, conducted by Ipsos, found that 73% of Americans agreed with Biden’s economic message to Congress this week, while 65% support tax hikes for the wealthy. The pandemic and its economic fallout are seen as key reasons for everyday Americans endorsing progressive economic measures.
- On the subject of American consumers, personal incomes in March in the USA grew 21.1% over February, setting a new record. Consumer spending climbed by 4.2%, while savings rose to 27.6%, indicating that consumers remain prudent.
- In other US economics news, US Treasury Secretary Janet Yellin warned that interest rates may need to rise soon, prompting equities markets to drop. She later walked back her comments, saying she was neither predicting nor recommending that the Federal Reserve raise interest rates in response to fears that President Biden’s spending plans might stoke inflation.
- Over in the eurozone, inflation is also being flagged as a concern, despite a soft economy. The eurozone entered recession territory with German GDP contracting 1.7% quarter on quarter, due to lockdowns and delayed vaccine rollouts. Nonetheless, the head of Germany’s central bank has cautioned that inflation may rise to as much as 3% later this year.
- April was a robust month for global equity markets, with the MSCI World gaining 4.7%. Our preferred quality style managers outperformed this index with net returns ranging between 6.4% and 7% in dollars.
- Automakers plan to build eight million electric cars a year in China by 2028, more than Europe and North America combined. By then, Europe is on course to make 5.7 million fully electric cars. This might see China dominate the car market of the future.
- While rich countries are resuscitating their economies as vaccine rollouts enable them to start rolling back lockdown measures, the virus continues to rage in poorer countries like Brazil and India. With a global vaccine shortage stalling plans to get shots in arms in poor countries, the news that Biden administration would support lifting patent protections on Covid-19 vaccines was welcomed. This could still be bad news for pharmaceutical giants like Pfizer, which generated $3.5 billion from its Covid-19 vaccine in the first quarter.
Local News
- The South Africa National Treasury notes that the budget deficit for March at R29.8 billion was below economist estimates of R50 billion.
- In another economic surprise, the surplus on South Africa’s merchandise trade account increased markedly to R52.77 billion in March, from R31.22 billion (revised) in February. The outcome was much higher than Bloomberg consensus expectations of a R23.6 billion surplus, driven by a 28.9% month-on-month increase in exports to R168.29 billion.
- JP Morgan’s global manufacturing PMI for March confirmed the strong growth in exports, “with growth of new export business the steepest since January 2018”. A SARS review of trade highlights found all key export categories increased on a month-on-month basis. Precious metals and stones exports grew by 41% month-on-month.
- In another sign of economic revival in the wake of Covid disruption, South African listed property is up more than 20% this year, after a pandemic plunge of 35% in 2020. The real estate investment trust (REIT) sector surged in April, eclipsing equities as the top-performing asset class on the JSE. (Dynasty remains unconvinced about prospects for this sector which performed at -24.4% for the period from 31 December 2020 to 30 April 2021).
- In a major political development, the ANC has finally suspended its Secretary-General, Ace Magashule, as part of President Cyril Ramaphosa’s anti-corruption drive. Magashule is determined not to go quietly, and seems set to rally his radical economic transformation faction to fight back against the clean-up campaign. For more insight and background into the ANC’s factional divisions, read this article from Professor Ivor Sarakinsky we published a couple of weeks ago.
- Data from Eskom shows that it has not been able to generate enough electricity to adequately meet peak evening demand. However, the outlook for the remainder of the year has improved significantly. It had projected a more than 2,000MW shortfall in meeting its demand and reserves for over half of the weeks to October. It no longer forecasts a significant shortfall until next April.
- South Africa has allocated an extra R4 billion to buy Covid-19 vaccines and extend the R350 special distress grant in a Special Appropriation Bill tabled by the finance minister.
Sources: Dynasty, Bloomberg, Reuters, The New York Times, The Wall Street Journal, Daily Maverick, BizNews, Business Day, Moneyweb, etc.
