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US tax package will boost Mexico and Canada: RBA

The US tax package will boost externally especially Mexico and Canada, highlighted the Reserve Bank of Australia (RBA).

The belief that vaccine launches could accelerate the return to economic normality and that the US fiscal package could provide the necessary support for many individuals and businesses helped improve confidence.

In response to the vaccination and the tax package, stocks rose while U.S. Treasury yields surged as investors focused on all the positive developments, looking past a winter spike in infections by Covid-19.

Now, the RBA expects the GDP of Australia’s main trading partners to grow by around 7% in 2021 and 4.5% in 2022 in annual average terms.

In general, households and businesses have continued to adapt to containment measures.

Tax package

Stronger-than-expected results in some economies in the first quarter have more than offset the effects of tighter or extended containment measures in several other economies.

In addition, the RBA expects the economic recovery of Australia‘s main trading partners to be sustained by controlling the virus through vaccines, as well as continued support from monetary and fiscal policy and the rebound in world trade.

Even with a strong recovery, the bank projects that the GDP of many economies will remain well below its pre-pandemic trajectory over the next few years.

Therefore, significant spare capacity is expected to persist in these economies.

Accordingly, price pressures should be contained for some time, and underlying measures of inflation are expected to be below central bank targets for several years.

The bank also projects the United States to recover faster and farther than other large advanced economies due to its broad fiscal support and the rapid rollout of vaccination.

Ultimately, the latest US fiscal package is expected to boost the rest of the world’s GDP by about half a percentage point, with the strongest effects in the economies with the largest direct trade links, such as Canada and Mexico.

 

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