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'Flood gates are about to open': Bank of America just boosted its forecast for 2021 US GDP growth for these 3 reasons

The US economy will experience "stellar" growth in 2021 as the COVID-19 pandemic subsides, Bank of America said in a note on Monday.

1. A larger fiscal stimulus package.

2. Better news on the virus front.

3. Encouraging economic data.

· US GDP growth will likely miss a key forecast if the global economy falters, Dallas Fed says

The US economic recovery hinges a great deal on how the rest of the world rebounds, according to researchers at the Federal Reserve Bank of Dallas.

For the moment, the US is expected to fully recover from its virus-induced downturn by the end of the year. The nonpartisan Congressional Budget Office projects gross domestic product will expand by 4.6% in 2021, offsetting the 3.4% contraction seen in 2020.

Yet global risks could drag US growth below the baseline forecast, Fed researchers Jarod Coulter and Enrique Martínez-Garćia said in a study published Tuesday. A model of cross-country growth dependencies shows significant downside risks, and even that outlook is a relatively conservative scenario, according to the team. The data doesn't reflect cross-country events linked to the pandemic.

Accordingly, the Fed's estimates suggest a greater likelihood of weaker-than-expected global growth. And further modeling suggests a weaker global rebound would cut into growth in the US.

· The Conference Board Economic Forecast for the US Economy

The U.S. economy has already partially rebounded from the deep contraction in the first half of 2020, a variety of factors will determine the way forward. Key variables include:
a) the spread of the virus itself
b) the deployment and effectiveness of COVID-19 vaccines
c) the size and timing of fiscal support
d) the status of labor markets and household consumption.

While there are many possible outcomes for these factors, The Conference Board has generated three potential recovery scenarios based on specific sets of assumptions.

Base Case Forecast

As noted above, our base case forecast yields Q1 21 real GDP growth of 2.0 percent (annualized rate), and an annual expansion of 4.4 percent (year-over-year) in 2021.* The recovery will likely continue into next year and yield an annual growth rate of 3.1 percent (year-over-year) in 2022. We view this scenario as the most probable. It assumes: a) new cases of COVID-19 peak in early Q1 21 and no widespread lockdowns are implemented; b) COVID-19 vaccinations rise in Q1 21, are broadly available in Q2 21, and are universally available in Q3 21; c) $1.5 trillion in additional fiscal support is deployed in Q2 21, and d) modest improvements in labor markets and consumption in Q1 21 precede a sharp rebound in Q2 21 and Q3 21. In this scenario, US monthly economic output returns to prepandemic levels in July 2021.

Upside Forecast

Alternatively, we offer a second more optimistic scenario in which the economy grows 6.4 percent (year-over-year) in 2021. This scenario assumes: a) new COVID-19 cases fall dramatically in late Q1 21 and social distancing policies loosen; b) vaccines are broadly available by the end of Q1 21 and are universally available in Q2 21; c) $1.9 trillion in additional fiscal support is deployed in Q2 21; and d) meaningful improvements in unemployment result in a rebound in consumption in Q1 21. In this scenario, US monthly economic output returns to prepandemic levels in April 2021.

Downside Forecast

Finally, we offer a third more pessimistic scenario in which the US economy grows by just 1.0 percent (year-over-year) in 2021. This scenario assumes a) new cases of COVID-19 rise in Q1 21 and vaccine-resistant mutations result in a "third wave" by Q4 21; b) distribution of vaccines is prolonged and mutations render it ineffective; c) only $600 billion in additional stimulus is deployed in Q2 21; d) unemployment deteriorates and consumption contracts in H1 21 and again in Q4 21; and e) a large correction in equity markets hurts consumer and business confidence. In this scenario, US monthly economic output does not recover to prepandemic levels until sometime in 2022.

* The Conference Board is upgrading its forecast of Q2 21 real GDP growth from 3.6 percent (annualized rate) to 4.7 percent (annualized rate). This upgrade is due our expectation that the US government approves a $1.5 trillion in fiscal support in March. Subsequent quarters are also positively impacted by the package.

· Anticipating a 2021 boom, fourth-quarter GDP is revised up slightly to 4.1%

The economy grew at a 4.1% pace in the final three months of 2020, slightly faster than first estimated, ending a year in which the overall economy, ravaged by a global pandemic, shrank more than in any year in the past seven decades.

The influx of new government stimulus efforts and accelerated vaccine distribution could lift growth in the current quarter, ending in March, to 5% or even higher, economists believe.

Reference: CNBC, The Conference Board, Business Insider