It’s The Virus, Stupid: With No Mandate For Change, Post-Election Economy Depends On Victory Over Covid

China and its neighbors have a leg up because they have already apparently gotten the virus under control and their economies are booming again. The U.S. will have to do the same.

While Donald Trump struggles against the inevitable in court, the rest of the world is looking forward to the incoming Biden administration. And the economy under Biden is likely to look an awful lot like the one under Trump, given a muddy election result that delivered the White House to the Democrats but will likely leave the Republicans in a blocking position in the U.S. Senate.

That means no sweeping changes in fiscal policy or the sort of wholesale remaking of the economy that the Obama administration attempted with the Affordable Care Act and regulatory initiatives like its Clean Power Plan, which would have eliminated coal from the nation’s power supply. The Biden administration certainly will try to enact tougher controls on fossil fuels and install pro-labor officials at the National Labor Relations Board but it won’t be able to get more aggressive measures past the GOP-controlled Senate.

“What normally happens, and this time is probably going to be different, a new president comes in with majorities in both houses of Congress and the first two years is when most of the legislation gets passed,” said Jan Hatzius, head of Global Investment Research at Goldman Sachs. “In this case that will only happen if the Republicans lose control of the Senate.”

In recent reports, Goldman predicts another trillion-dollar stimulus package and a V-shaped recovery in contrast to most postwar recessions, which were driven by deeper distress in the financial sector like the mortgage crisis that precipitated the Great Recession of 2007-09. GDP growth will surge to 5.3% from a 3.5% shrinkage this year, Goldman says. But fiscal support will be “more limited than in a Democratic sweep scenario,” Hatzius said.

“The main driver of the cycle is going to be the health situation,” he said.

Goldman is modeling a base-case scenario of divided government in Washington and an effective vaccine sometime in 2021, both of which look highly likely now. Despite the resurgent economy, inflation will remain subdued. There might be some higher inflation figures in the first half but that will mainly reflect year-over-year increases from this spring, when the economy was blasted into a near-depression by the Covid lockdown.

“The numbers in the spring of 2021 are going to look higher but I think it’s going to be temporary,” Hatzus said. “The starting point is clearly below 2% and it takes quite a lot of additional activity to create enough pressure in the labor market and capacity utilization to push inflation higher.”

What about resurging consumer activity if the coronavirus restrictions are lifted?

“There is a link but that link tends to be relatively muted,” he said.

One bright spot will be construction, Hatzius predicts, with housing starts expected to climb 40% from the lows of this spring and home prices rising a robust 4.2% or more. Health insurers may not do so well – they’ve racked up higher margins this year because they are receiving the same premiums but paying fewer claims as customers avoid hospitals due to Covid-19. The future of ealthcare and insurance pricing will be “policy driven,” Hatzius predicts.

“If you don’t get major changes in policy, then you probably also aren’t going to get large impulses from healthcare cost inflation,” he said.

The same picture appears to be emerging for the rest of the world: Economic recovery driven almost entirely by the rate by which countries defeat Covid-19. China and its neighbors have a leg up because they have already apparently gotten the virus under control and their economies are booming again. Goldman predicts 7.5% GDP growth in China next year and India, if it emerges from lockdown, will expand by 10%.

One surprising bright spot in the U.S. statistics shows bankruptcies are well below the level of the 2008 recession and new business formations exploded, rising some 60% between May and October. The increase can’t be attributed entirely to rebound from the spring, Goldman says.

“Our preliminary takeaway is that the pandemic recession has not only caused less scarring than widely anticipated, but might actually have jolted the economy’s dynamism to some degree,” the company concludes.

The energy industry may face some of the biggest changes, other analysts predict. President Biden will have difficulty pushing legislation to outlaw fracking or eliminate coal-fired power plants but he can accomplish a lot through executive orders and regulatory agencies under his control. Some of the Trump administration’s regulatory rollbacks are still stuck in the courts, such as his loosening of controls on methane emissions, and will be easy game for Biden to reverse.

The $2 trillion Biden climate plan isn’t likely to be enacted through legislation any time soon but components of it could emerge to stimulate sectors of the renewable energy industry, especially wind, solar and electric vehicles. Renewables subsidies are popular – witness Tesla’s surging sales and recent advancement to the S&P 500 – and Biden likely won’t have much trouble obtaining more support for rooftop solar panels, EV charging stations and tax subsidies for windmills.

Voters sent a powerful message at the polls that aggressive measures to reduce oil and gas drilling, such as a ban on fracking, are unpopular. But the Biden administration is likely to revive some form of carbon pricing, which large oil companies like ExxonMobil favor, as well as lower-profile legal and regulatory measures designed to hinder the expansion of pipelines and other infrastructure. Hydrocarbons will continue to power the economy, but with only the grudging support of the new occupant of the White House.