Covid response stimulus - Implications

The U.S. had the largest fiscal stimulus (both in absolute dollars and as a % of 2019 GDP), of all the major economies, in response to the Covid economic shock. However, the share of the fiscal stimulus spent on ‘green efforts, also called green stimulus’, was only 1.1% in the U.S. compared to 20% in the European Union (green stimulus indicates spending on clean energy, renewables and climate change mitigation efforts). Given that,

·      The Covid shock was the biggest economic shock since World War II.

·      Fiscal stimulus spending is not inherently good or bad, it is the target of the spending that is important. If the stimulus increases the potential economic growth of the country, then it is productive or good spending that over time will pay for itself. It then follows that fiscal stimulus geared towards ‘the potential new technology or the growth areas of tomorrow or what addresses the critical issues of the present and future’’ will have big implications!

·      New technology creating new products, services, or new ways of doing things and hence increasing productivity…these are the ways economic growth suddenly increases or enters a new growth cycle (as in the industrial revolution of late 1700s and the internet boom of 1990s).

·      Arguably, climate change is a crisis with immense implications and green technology may well be the next technological revolution. To quote just one influential study on the economic impact of climate change – The Federal Reserve Bank of Richmond estimated that “rising temperatures could reduce overall growth of U.S. economic output by as much as one-third by 2100”.

Putting it all together, it seems quite likely that the implications for relative economic growth of the U.S. and Eurozone, and their respective financial markets, will continue throughout the coming decade.

Sources: Wall Street Journal (9/12/20), IMF, Federal Reserve Bank of Richmond Economic Brief (August 2018)

#climatechange #cleantech #greenstimulus #assetallocation #esg #coronavirus #eurozone