as policy stimulus
feeds through,
economic activity
resumes, therapeutics
improve
the bottom
as virus cases
recede and
there's partial
re-opening
Despair
triggered by
social distancing,
fallout of health
crisis, declining
confidence and
tighter financial
conditions
A U-shaped path
4Q onwards
3Q
1Q - 2Q
Real GDP
Repair
What will the US presidential election deliver?
Is this Europe’s defining moment?
Can inflation make a comeback?
What’s left in the policy tool kit?
How will the global economy emerge from the crisis?
5
4
3
2
1
5 key questions for 2020 and beyond
From despair
to repair
Back to viewfinder
Governments have pulled out all the stops with their fiscal policies
to support their economies
Source: National governments
∆ gov't balance & contingent debt, % of GDP
Fiscal stimulus in 2020
Source: Edwards, G., Barrett, A., & Peake, J. (1997). The Legislative Impact of Divided Government.
American Journal of Political Science, 41(2), 545-563. doi:10.2307/2111776
On average, divided governments pass less legislation that is significant
than unified governments over the course of a congressional term
Since 2011 inflation expectations have been trending down
Source: Federal Reserve Bank of St. Louis
5-Year Forward Inflation Expectation Rate
Ursula von der Leyen,
President of the European Commission, 11 December 2019
“Our goal is to reconcile the economy with our planet, to reconcile the way we produce and the way we consume with our planet and to make it work for our people. Therefore, the European Green Deal is on the one hand about cutting emissions, but on the other hand it is about creating jobs and boosting innovation.”
In response to the crisis central banks around the world cut interest rates
representing an unprecedented monetary policy impulse
Source: National central banks
+75 bps
of rate cuts
+65 bps
of rate cuts
+150 bps
of rate cuts
Central bank balance sheet, % of GDP
Change in monetary policy in 2020
COUNTERPOINT VIEW
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.
CONVENTIONAL WISDOM
What will the US presidential election deliver?
05
US ELECTION
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?
COUNTERPOINT VIEW
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.
CONVENTIONAL WISDOM
Is this Europe’s defining moment?
04
EUROPE
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.
COUNTERPOINT VIEW
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.
CONVENTIONAL WISDOM
Can inflation make a comeback?
03
INFLATION
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.
COUNTERPOINT VIEW
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.
CONVENTIONAL WISDOM
What’s left in the policy toolkit?
02
POLICY
Central banks have exhausted monetary policy, leaving government fiscal policies as the only way to boost economic growth.
COUNTERPOINT VIEW
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.
CONVENTIONAL WISDOM
How will the global economy emerge from the crisis?
01
POST-CRISIS
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?
This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 20 June, 2020 and are subject to change. This information is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.
Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved. Privacy Statement
Invest in a richer life,
however you define it.
Source: Edwards, G., Barrett, A., & Peake, J. (1997). The Legislative Impact of Divided Government.
American Journal of Political Science, 41(2), 545-563. doi:10.2307/2111776
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.
01
POST-CRISIS
How will the global economy emerge from the crisis?
CONVENTIONAL WISDOM
COUNTERPOINT VIEW
ASKING THE DIFFICULT QUESTIONS HAS NEVER BEEN MORE IMPORTANT
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.
02
POLICY
What’s left in the policy toolkit?
CONVENTIONAL WISDOM
Central banks have exhausted monetary policy, leaving government fiscal policies as the only way to boost economic growth.
COUNTERPOINT VIEW
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.
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?
What’s left in the policy tool kit?
5 key questions for 2020 and beyond
How will the global economy emerge from the crisis?
1
2
5
3
Can inflation make a comeback?
4
Is this Europe’s defining moment?
What will the US presidential election deliver?
Since 2011 inflation expectations have been trending down
COUNTERPOINT VIEW
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.
This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 20 June, 2020 and are subject to change. This information is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.
Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved. Privacy Statement
Invest in a richer life,
however you define it.
CONVENTIONAL WISDOM
Source: National central banks
In response to the crisis central banks around
the world cut interest rates representing and
unprecedented monetary policy impulse
Source: National governments
Governments have pulled out all the stops with their fiscal policies to support their economies
Source: Federal Reserve Bank of St. Louis
The US political climate has become less important at a time that’s dominated by news about the coronavirus pandemic.
What will the US presidential election deliver?
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.
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.
03
INFLATION
Can inflation make a comeback?
CONVENTIONAL WISDOM
The side effects of the coronavirus pandemic will send a deflationary pulse throughout the global economy for many years to come.
COUNTERPOINT VIEW
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.
Is this Europe’s defining moment?
05
US ELECTION
CONVENTIONAL WISDOM
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.
COUNTERPOINT VIEW
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.
Ursula von der Leyen,
President of the European Commission, 11 December 2019
“Our goal is to reconcile the economy with our planet, to reconcile the way we produce and the way we consume with our planet and to make it work for our people. Therefore, the European Green Deal is on the one hand about cutting emissions, but on the other hand it is about creating jobs and boosting innovation.”
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?
04
EUROPE