Deutsche Bank: Watch What Happens Once The End Of Stimulus Starts Gouging Economic Growth In January

Here’s a nice quantification of the effects of U.S. fiscal stimulus from Deutsche Bank. Already the GDP-growth boost has begun to wane as stimulus programs wind down, but the real effect of lost stimulus will start to hit in Q1 of next year.

We’ll then have a straight four quarters of fiscal drag. Yes everyone has been saying this in vague terms, but this is an attempt to put an exact figure on just what the effect might be:

Deutsche Bank:

Despite the extensions and the large amount of funds still to be spent, we estimate that the boost to GDP growth is set to fall to neutral this summer, turn negative in the fall, and become a noticeable drag on growth in 2011. Chart 2 shows the estimated boost to the level of GDP based on the tax and spending multipliers we discussed above. This boost peaks in 2010Q3 and then starts to decline. This impact on the level of GDP is translated into growth rate terms in Chart 3. The estimated drag on GDP growth during 2011 averages about 1 percentage point.    Discretionary government spending (investment in infrastructure, etc.) continues to boost growth through the end of this year, but is more than offset in Q4 by the drag from revenues and entitlement spending. All components of the program diminish growth in 2011.


However, it should be noted that Deutsche’s Peter Hooper expects our latest round of quantitative easing to provide a boost to GDP, enough to help buoy the economy through 2013:


(Via Deutsche Bank, Impact of QE2, Peter Hooper, 4 November 2010)

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