For some time already, we are waiting for the ‘real’ recovery: the moment the economy opens again, that we can travel, shop and meet family and friends. And although hopes are up, the coming few weeks will still be harsh in Western Europe. After that, the worst of the pandemic will there be over, and recovery can start. For developing economies prospects are less rosy: the worst of the direct effects of the pandemic may be over, but slow vaccinations and limited room for governments to support the economy put a brake on the recovery and ongoing infections bear the risk of new mutations and a continuing pandemic.
Q2 Investment Outlooks
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Advanced economies - Building back without foresight
Emerging markets - Repairing the ship while sailing the COVID-19 waves
A year into the pandemic, the first green shoots are cautiously sprouting up. We have learned several important lessons. The two most important: economies are more adaptive than anticipated and policymakers are capable of thinking ‘big and bold’. The positive macroeconomic news is that the economic effects of the measures taken to combat the virus seem to be less severe than previously expected.
First, economies seem to be more resilient and flexible than previously thought. As it turned out, economies proved able to adapt to new situations. From offline to online, from disrupted supply chains towards an economy where industrial production surged during the second lock-down. These are massive changes in behaviour and economic relations.
Secondly, from the early days of the pandemic, monetary policy has been very aggressive to support markets. Unprecedented is a word that is often used to describe the actions of monetary and fiscal policymakers. The result was calming financial markets and recovery of asset prices. Maybe the interventions were a little too successful, leading to asset price bubbles. In countries with more fiscal space, fiscal policymakers also performed their emergency task. Compared to the 2008/09 financial crisis this is already a big difference in policy stance.
Speaking of unprecedented: the fiscal package proposed by President Biden deserves the superlative of unparalleled unprecedented. Signed into law on 11 March, this package comes on top of a USD 900 billion package already approved in December and will probably be followed by another USD 2 trillion to be spent on infrastructure. Together with the proposed global minimum corporate tax and the fact that the US re-joined the Paris climate agreement, these are green shoots that need to be nurtured.
All in all, the policy interventions delivered what they aimed for: less severe downturns, fewer bankruptcies and job losses.
Pros and cons
Besides the positives, however, there are three clear negatives. The massiveness of fiscal support is leading to a large increase in debt, laying a claim on future growth.
In addition, the policy design was rather myopic: we forgot to tie the recovery measures to a sustainability agenda. That means essentially that all the money spent was used to save an already failing economic system, rather than to build back better. Short-termism once again.
Third, there is a clear divergence between advanced economies, which were able to boost their economies more and start vaccinating sooner than emerging economies, whose outlook is therefore less positive.
The longer-term perspectives are still uncertain. There probably will be scars left - long-term damage to the economy because of idle production capacity, negative effects on human capital, and delayed investments. These will have adverse effects on productivity growth and will likely take a long time to heal. Another, probably longer-term, negative effect is rising inequality and poverty, especially in emerging economies. In fact, the complete agenda on sustainable development as represented by the UN Sustainable Development Goals is thrown back for years. Without more international solidarity, the effects of the corona pandemic will last (much) longer there.
On balance, however, two bright sparks stand out: Bold collective action to move the needle is possible and people and economies appear able to adapt.
What does that mean for the recovery agenda coming years? First, we should use bold, but this time longer-term public policies to address the biggest threats of our times: climate change, biodiversity loss, and the divergence between rich and poor countries. The requires a fundamental rebuilding of our economies: energy systems, infrastructure, mobility, resource use, land use, redistribution of capital and income, you name it.
And to be able to get there, we only must remember the second lesson learned: economies and people are flexible and adaptive. If we change the rules in our economy, we can adapt in the most efficient way. In the case of COVID-19 we closed whole sectors of the economy. For a sustainability transition that is not even necessary. We ‘only’ need to transform. Still a massive task. But now is the time to nurture those green shoots.
Q2 Investment Outlooks
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