Although everyone is focusing on the pandemic at the moment, the US presidential election is crucially important for the longer-term outlook for the economy and financial markets. For investors, the result matters because it will determine the government’s ability to implement policy change. Will the While House and Congress be able to work together or in deadlock?

A unified government is more likely to be able to introduce policies that help the economy recover, regardless of which party wins control. If political institutions are divided then the outlook may be more uncertain. The result of November’s election will also have implications for ongoing trade tensions as well as the way in which the US engages with global institutions and initiatives. They include environmental measures, such as the 2017 Paris Agreement to slow the pace of global warming, which President Trump withdrew from soon after he came to office in 2017. Trump has also rolled back rules that compel auto companies to produce more fuel-efficient vehicles, and could continue to relax regulations designed to protect the environment in order to boost short-term growth.

The US political climate has become less important at a time that’s dominated by news about the coronavirus pandemic.

Europe’s Green Deal now looks even more ambitious. The plan is to transform the region to a low-carbon economy without reducing prosperity and while improving people’s quality of life. Can Europe’s leader seize this moment to implement their new growth strategy by introducing new legislation and encouraging private sector investment in high-tech and green industries?

A full fiscal union is unlikely, where national expenditure and tax rates would be set at the European Council level, and collective Eurobonds would replace individual national debt. Yet we believe financial markets are underestimating the EU’s ability to integrate further. The road may be rocky at first, but it could ultimately start to address some of the structural issues that have dogged the region for so long.

If European policymakers do surprise the sceptics and embark on a path of reform, then the economy and markets would respond positively. The pace of growth could pick up, stock markets and corporate bonds could rally, the euro could appreciate against the major currencies, and interest rates could begin to rise towards the central bank’s 2% target rate.

We’re not suggesting that further steps towards fiscal integration, along with existing monetary tools, can prevent the region suffering a recession following the lockdown. However, we think markets underestimate the possibility that policymakers will respond to Europe’s vulnerabilities by taking a step in the right direction through closer integration.

The European Union has made only limited progress towards fiscal integration over the past decade, and is unlikely to achieve much more during the next one.

Slightly higher inflation should help to support the recovery. Conditions that are not too hot or cold would allow market-friendly monetary policies to sustain moderate economic growth. At the same time, we acknowledge long-term disinflationary forces that are likely to put downward pressure on price rises – from ageing populations to digitisation.

Yet on balance, we believe that once a vaccine breakthrough is in sight, the pace of economic growth will begin to gather pace and inflation will begin to rise. Meanwhile, economic protectionism could gain momentum at the same time that populist measures push up wages, boosting household incomes and consumer spending. Over the longer term, the transition to renewable sources of energy could take place at a faster pace than the economics would justify if policymakers put in place the incentives. This shift could contribute to higher inflation as low-cost fossil fuels are forced out of the energy mix.

According to market expectations, the rate of inflation around the world is set to remain very low for an extended period of time. However, we believe that as the global economy begins to recover, inflation will pick up gradually owing to various forces. They include stimulus measures and companies shrinking their global supply chains towards more local sources.

The side effects of the coronavirus pandemic will send a deflationary pulse throughout the global economy for many years to come.

The policy impulse is strong because there is no moral hazard like in the 2008 financial crisis, where banks took large risks and so, subsequently, had to go through a long process of deleveraging. Notably, the banking system is now in a strong position following a decade of tighter regulations, and can deploy its healthy balance sheet to support the recovery.

Central banks are buying corporate bonds through their asset-purchase programmes (also known as quantitative easing), thereby injecting money directly into the private sector. Although formally monetary policy, this approach is an indirect form of fiscal policy, which enables businesses to borrow at affordable rates. Central banks are also providing a cheap source of funding for government spending programmes.

We expect both monetary and fiscal policies to sustain the recovery by helping businesses and their employees through the crisis. Working together, central banks are funding their government’s stimulus measures so they can do whatever it takes, for however long it takes, to repair their economies and set them on solid foundations for future growth.

Central banks have exhausted monetary policy, leaving government fiscal policies as the only way to boost economic growth.

As governments around the world begin to loosen the lockdown measures they have put in place to slow the spread of Covid-19, we expect economic activity to begin to pick up. Social distancing measures are set to remain in place for some time, slowing the pace of the recovery. Yet it will be supported by unprecedented monetary and fiscal stimulus, along with relaxed regulatory and tax policies.

Although most developed economies have experienced a prolonged period of expansion since their recovery from the 2008 financial crisis, no major imbalances exist – except perhaps in the riskier part of the US corporate sector. For example, past recessions have taken place when households and businesses have taken on too much debt. With no significant past excesses to correct this time, we believe the recovery will start straight away.

We also expect the recovery to be U-shaped as the economy moves from the despair of a deep recession to the repair phase. Yet it will take place at different speeds. Some companies will be able to generate income again relatively rapidly, while others will be unable to adapt to the challenging environment and face solvency problems.

The lockdown has cut emissions of greenhouse gases and some governments want to go further by harnessing their recovery plans to boost low-carbon industries. Their slogan is “Build Back Better”, but low oil prices could make it difficult to succeed. However, we believe there will be meaningful positive changes emanating from the crisis. We expect that employees will continue to benefit from more flexible working arrangements when the lockdown eases, which is a trend that should increase opportunities for working parents and those with limited mobility.

The global economy will recover from the recession caused by the coronavirus pandemic gradually, creating a U-shaped path.

We’ve produced our mid-year outlook to help investors make sense of an unusually uncertain situation for the global economy and financial markets. Investing is a long-term process that requires patience and the ability to stay calm when markets fluctuate. We hope our analysis provides a useful insight into how the situation may play out over the next few months.

ASKING THE DIFFICULT QUESTIONS HAS NEVER BEEN MORE IMPORTANT 

There’s still a lot we don’t know about coronavirus, and a return to how life was at the start of 2020 is some way off. Although lockdown restrictions are easing, the pandemic will affect our lives in many ways. What’s likely to get back to normal, in one form or another, and what’s likely to change more permanently?