The American Rescue Plan's Economic and Financial Impact...A Year After the Market Trough...What's Ahead for China's Growth

[Goldman Sachs]( [BRIEFINGS] March 25, 2021 The American Rescue Plan’s Economic and Financial Impact Above (L to R): Alec Phillips, Amelia Garnett, Susie Scher and Ashish Shah of Goldman Sachs As the Biden administration moves to implement the American Rescue Plan, leaders from the firm joined Exchanges at Goldman Sachs to discuss the potential impact on the economy and markets. To start, the plan’s $1.9 trillion size should help accelerate growth and return economic indicators like unemployment to pre-COVID levels, says Alec Phillips of Goldman Sachs Research. In terms of implications for longer-term fiscal policy, “probably the most important thing that came out of this package was the expansion of the child tax credit,” says Phillips, who notes that the structure of periodic payments under the credit could create some momentum for payments to extend beyond the current expiration in September. Markets are also responding to the legislation, says Amelia Garnett of Goldman Sachs Global Markets, noting the particular impact on retail investing. “Over the next few weeks, around $400 billion in direct payments are hitting American wallets across the nation, and potentially a meaningful share of those could end up in equity markets,” she says. At the same time, corporate activity is picking up on an expected boom in consumption—especially in virus-sensitive industries, such as travel and dining, according to Susie Scher, chair of the global financing group in the firm’s Investment Banking Division. The stimulus “gives our corporate CEOs a lot of confidence to contemplate M&A and investors the confidence to fund it,” she says. Meanwhile, the brighter economic outlook also raises the prospect of higher inflation and interest rates for fixed income investors and for investors’ portfolios more broadly, says Ashish Shah of the Asset Management Division. “This growth is going to be really good for credit quality. And this steep yield curve, as well as credit curves, represent a really good opportunity for investors who want to diversify away from some of the gains they've built in the equity markets and [those who] are afraid of rising rates,” he says. [Listen to podcast]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=The%20American%20Rescue%20Plan%E2%80%99s%20Economic%20and%20Financial%20Impact&body=https%3A%2F%2Fyoutu.be%2FUBrswjbBsUE) The Daily Check-In at Goldman Sachs Above (L to R): Kamakshya Trivedi, Damien Courvalin, Brook Dane and Sylvia Yeh of Goldman Sachs In recent episodes of The Daily Check-In, experts from Goldman Sachs discuss the story behind the market’s recovery since reaching a trough this time last year, why the rise in commodities prices signifies a “new structural bull market,” new opportunities for tech investors amid the recent sell-off and the outlook for muni markets. Kamakshya Trivedi of Goldman Sachs Research on the speed of recovery since reaching a market trough one year ago: “The key takeaway for me is that the historical playbook worked in terms of what conditions you needed to see for the markets to trough and move up again. But that it all happened at a much faster pace. This was a cycle on fast-forward.” [[Watch video]( Damien Courvalin of Goldman Sachs Research on how the distribution of vaccines and the stimulus package are boosting demand, helping to strengthen a structural bull market in commodities: “The evidence for this structural bull market case is surprisingly strong already...This pandemic is ultimately a restriction on services. But that's actually led to more goods demand. You can see it in retail sales, in volumes of goods shipped.” [[Watch video]( Brook Dane of Asset Management on how investors can find opportunities beyond the mega-cap tech companies: “There's a huge amount of innovation happening both in mid-cap names in the U.S., but then more importantly, in emerging geographies and in international markets…that investors just don't have exposure to right now.” [[Watch video]( Sylvia Yeh of Asset Management on why the muni markets fared better than expected during the pandemic: “Three bullets: the breadth and diversification and stability of the underlying revenue streams; the conservative financial operations and strength of balance sheets; and the conservative debt practices that these municipalities carry.” [[Watch video]( For more Daily Check-In videos, [subscribe to our channel]( on YouTube. [Watch videos]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=The%20Daily%20Check-In%20at%20Goldman%20Sachs&body=https%3A%2F%2Fwww.youtube.com%2Fplaylist%3Flist%3DPLIyiGQywEp65ogt2Bi3vTK7ngXDTM6wT9) Goldman Sachs 2020 Annual Report and Letter to Shareholders In his annual letter to shareholders released last week, Chairman and CEO David Solomon reflects on the unprecedented events of 2020 and how they shaped Goldman Sachs’ business. “The pandemic put enormous strain on everyone, from families caring for relatives they couldn’t visit in person to small-business owners forced to cut back their livelihoods. And though I was pleased to see central banks and governments take swift action to support their economies, no amount of monetary or fiscal stimulus could make up for the millions of lives lost or upended by the virus,” he writes. Solomon points to the people of Goldman Sachs as critical to the firm’s strong financial performance in 2020. “I am incredibly proud of the progress we made in 2020, and we never would have done it without the extraordinary efforts of our people. I am humbled by the commitment I see across our firm every day.” (Read the full letter [here]( [Read Letter to Shareholders]( [Read 2020 Annual Report]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Goldman%20Sachs%202020%20Annual%20Report%20and%20Letter%20to%20Shareholders&body=https%3A%2F%2Fwww.goldmansachs.com%2Finvestor-relations%2Ffinancials%2Fcurrent%2Fannual-reports%2F2020-annual-report%2Fmultimedia%2F2020%2Fletter-to-shareholders) Briefly…on What’s Ahead for China’s Growth in 2021 More than one year into the pandemic and in the wake of the conclusion of China’s 14th National People’s Congress, investors are focusing on how the country will achieve its announced growth target of 6%. At a recent Goldman Sachs Asset Management Forum session, Prakriti Sofat, a portfolio manager who invests in emerging markets, explained the key economic drivers for China this year. China just completed its Two Sessions, the country’s biggest political and economic gathering of the year, where the government said it would target growth of more than 6% in 2021. What is the significance of that target? Prakriti Sofat: We feel the 6% growth target is quite a low threshold given the median consensus forecast. The government is using a conservative growth forecast primarily because of its focus on structural reform, innovation and the quality—rather than the quantity—of growth. The goal is to rotate the economy to be consumption-led, environmentally conscious and technology-oriented. During the Two Sessions, China also reiterated its commitment to reduce carbon emissions 18% by 2025 and achieve net zero emissions by 2060, which is significant given that China is the world’s largest coal consumer. Given the increased focus on qualitative factors, how will government policy evolve in 2021? Prakriti Sofat: We expect less policy support for a start. Policymakers in China tend to balance the tradeoff between using policy to increase economic growth versus maintaining financial stability and containing leverage. As leverage in the country’s economy has built up, the government started to shift its focus toward financial stability in the third quarter of last year. This year, we believe policy normalization will entail a notable deceleration in credit growth, a smaller fiscal deficit, marginally tighter housing policies and stable monetary policy. This should help China stabilize the country’s debt-to-GDP ratio at just under 300%. How would you characterize China’s economic growth last year? Prakriti Sofat: China was “first in, first out” of COVID-19. The Chinese economy grew 2.3% in 2020, and its GDP closed the year 6.5% above the fourth quarter 2019 levels, according to official data from the National Bureau of Statistics. In fact, China was one of the few economies whose GDP surpassed its pre-pandemic GDP levels in 2020. Solid export demand, industrial production, infrastructure investment and real estate activity all fueled growth last year, but consumption and services lagged. What do you see as the economic drivers in 2021? Prakriti Sofat: We expect manufacturing activity and increased household consumption will be the main drivers of economic growth this year. The manufacturing sector has faced many headwinds in recent years in part because of U.S.-China trade tensions, which created uncertainty for corporates, as well as a fall in domestic demand and investment in the sector last year. But there are a number of tailwinds for the sector in 2021. For one, Chinese exports actually accelerated in the first few months of 2021, according to China Customs, at a time when we are seeing improved global growth outlooks. So the strong export demand is continuing to support investments in manufacturing. In addition, capacity utilization is rising, corporate profits appear to be improving and there is demand to upgrade industrial equipment. On the consumption side, while retail sales are still lagging behind other sectors in the economy, we expect the rollout of the vaccine, employment gains, income growth, and, to some degree, an unwinding of excess savings will help normalize contact-based services, and related retail and consumption activity. And how is 2021 shaping up so far? Prakriti Sofat: Early 2021 activity data was mixed. Data from January and February showed a broad-based acceleration in exports across product types and destinations, and solid industrial production activity. However, retail sales growth was weak amid stringent restrictions to control a mild rise in COVID-19 cases. We’re keeping a close eye on manufacturing investment—which we expect to be a core driver of growth in 2021—as activity appears to have weakened significantly in recent weeks. That said, the low base of 2020 should pave the way for a significantly above-trend growth rate. [Read more Briefly Q&As]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Briefly%E2%80%A6on%20What%E2%80%99s%20Ahead%20for%20China%E2%80%99s%20Growth%20in%202021&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Fseries%2Fbriefly%2Findex.html) Goldman Sachs Media Highlights Bloomberg - March 23 [No 'Broad Bubble' in Equities Says Goldman's Oppenheimer]( (8:14) [Subscribe]( [Unsubscribe]( The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. Goldman Sachs has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data. 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