A ‘blue sweep’ could boost US recovery and lift GDP across the euro-area, Goldman Sachs says

• A sweeping Democratic win could entail significant increases in financial stimulus, boosting US output by two to three percentage points, Goldman Sachs said in a note
• Using previous studies, a team of Goldman Sachs economists believe this could boost euro area GDP by around 0.5% in the next two years. 
• The European economy could also benefit from a potential easing of US-China trade tensions under a Biden presidency, the bank said.
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A “blue wave” in the upcoming presidential election could unleash a $2 trillion stimulus package, and this will not only boost the US, it could also lift euro area GDP by 0.5% over 2021-2020, Goldman Sachs economists said in a note on Tuesday.

The Goldman Sachs team forecast that a Democratic sweep would entail a “large fiscal stimulus package of at least $2 trillion shortly after the presidential inauguration”, followed by longer term spending, the note said.

Built on the Fed’s macro model, and assuming the Federal Open Market Committee does not hike rates until inflation moves above 2%, the Goldman team estimates such a package could raise the US output by two to three percentage points over the coming years.

This would have positive spillover effects for the euro area, the note said.

Previous studies have shown a boost of 0.1-0.25% for European GDP on each 1 percentage point gain in U.S. output gap. The team, led by Sven Jari Stehn, used the midpoint of this range, pointing to a boost of around 0.4% to European real GDP after two years.

If the full package of Biden-Harris policies were implemented, this economic gain for the euro zone would increase to 0.6%, the note added.

Under a Biden administration, Goldman expect tariffs on China to be eased and the threat of such policies against Europe to be taken off-the-table, the note said. If this is the case, uncertainty over US policy would decrease, boosting European trade. Using a study on the 2018-19 trade war, increased stability in US trade policy could boost “Euro area activity by around 0.2% in 2021-22,” the note said.

In the event of a blue wave election, the Goldman rates team anticipates a treasury sell-off pushing down long-term Treasury yields around 30-40 basis points, the note said, pushing European bond yields up by 10-15 basis points. Additionally, a democratic sweep would depreciate the dollar against the euro, meaning Goldman’s FX team are recommending dollar shorts into the year-end.

Whilst euro strength could weigh on inflation, the economists believe the monetary implications for the European Central Bank are limited. The stronger growth and weaker inflation would broadly offset each other, unless the euro strengthened significantly up in any election response.

The Goldman research does accommodate for different outcomes, in particular a “more adverse reaction of European financial conditions would offset almost all the gains from stronger foreign demand,” the note said.