Morgan Stanley economists said failure by Republicans and Democrats to agree on a fresh round of U.S. fiscal stimulus would put off by six months the time it will take for the economy to recover its pre-COVID-19 output.
“It’s increasingly difficult to ignore the lack of results in the negotiations,” Ellen Zentner and Michael Zezas, economists at the Wall Street bank, wrote in a recent note. “Without negotiating progress in the short term, we’re inclined to remove proactive fiscal stimulus” from baseline forecasts, they wrote.
Morgan Stanley had counted on a sequel to March’s $2 trillion CARES Act, which helped restore growth after a deep contraction in the second quarter. The economists had penciled in a $1.5 trillion to $2 trillion package, but talks between the White House and Democratic leaders in Congress broke off in early August.
Without a breakthrough on pandemic relief, the economy won’t get back to where it was before the coronavirus until the fourth quarter of 2021, according to the bank. That’s two quarters longer than with the stimulus, the economists estimated. A smaller package could delay the rebound by one quarter, they wrote.
“Should Congress fail to pass CARES 2, the loss of fiscal impulse would be sizable,” Zentner and Zezas wrote. “Strong underlying momentum can likely carry the economy for a bit longer, but ultimately the recovery would slow.”
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