From despair 
to repair

5 key questions for 2020 and beyond

1

2

3

4

5

How will the global economy emerge from the crisis? 

What’s left in the policy tool kit? 

Can inflation make a comeback? 

Is this Europe’s defining moment? 

What will the US presidential election deliver? 

Invest in a richer life,
however you define it.

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


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?

ASKING THE DIFFICULT QUESTIONS HAS NEVER BEEN MORE IMPORTANT 

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.

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

POST-CRISIS

01

How will the global economy emerge from the crisis?

CONVENTIONAL WISDOM

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.

COUNTERPOINT VIEW

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

POLICY

02

What’s left in the policy toolkit?

CONVENTIONAL WISDOM

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.

COUNTERPOINT VIEW

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.

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

INFLATION

03

Can inflation make a comeback?

CONVENTIONAL WISDOM

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.

COUNTERPOINT VIEW

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.

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.

EUROPE

04

Is this Europe’s defining moment?

CONVENTIONAL WISDOM

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.

COUNTERPOINT VIEW

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?

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

US ELECTION

05

What will the US presidential election deliver?

CONVENTIONAL WISDOM

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.

COUNTERPOINT VIEW

Change in monetary policy in 2020

Central bank balance sheet, % of GDP

+150 bps
of rate cuts

+65 bps
of rate cuts

+75 bps
of rate cuts

Source: National central banks

In response to the crisis central banks around the world cut interest rates
representing an unprecedented monetary policy impulse

Fiscal stimulus in 2020

∆ gov't balance & contingent debt, % of GDP

Source: National governments

Governments have pulled out all the stops with their fiscal policies
to support their economies

“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.”

Ursula von der Leyen,
President of the European Commission, 11 December 2019

5-Year Forward Inflation Expectation Rate

Source: Federal Reserve Bank of St. Louis 

Since 2011 inflation expectations have been trending down

On average, divided governments pass less legislation that is significant
than unified governments over the course of a congressional term

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

Repair

Real GDP

1Q - 2Q

3Q

4Q onwards

A U-shaped path

Sudden stop
triggered by
social distancing,
fallout of health
crisis, declining
confidence and
tighter financial
conditions

Despair

Economy is past
the bottom
as virus cases
recede and
there's partial
re-opening
Recovery strengthens
as policy stimulus
feeds through,
economic activity
resumes, therapeutics
improve

From despair 
to repair

5 key questions for 2020 and beyond

1

How will the global economy emerge from the crisis? 

2

What’s left in the policy tool kit? 

3

Can inflation make a comeback? 

4

Is this Europe’s defining moment? 

What will the US presidential election deliver? 

5

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?

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.

POST-CRISIS

01

How will the global economy emerge from the crisis?

CONVENTIONAL WISDOM

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

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.

POLICY

02

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.

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.

INFLATION

03

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.

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.

Is this Europe’s defining moment?

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.

“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.”

Ursula von der Leyen,
President of the European Commission, 11 December 2019

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?

EUROPE

04

US ELECTION

05

What will the US presidential election deliver?

CONVENTIONAL WISDOM

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

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.

Invest in a richer life,
however you define it.

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


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 

Since 2011 inflation expectations have been trending down

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

Contact us

For further information, please visit: www.quintet.com

Please enter your name
Please enter a correct e-mail address
Please enter a comment
Thank you! Your message has been sent.
Something went wrong while submitting the form. Try again.

Share this page

Forward this page by e-mail or share it directly on social media.

Search

Search for an article within this publication.
Minimal length to search is 3 characters

Download PDF

This publication is available in PDF format. Click the button below to start the download, this can take several seconds. Note that interactive components like videos & slideshows are missing in the print version.
Download single article PDF
Download complete PDF

Seeing the world differently

Counterpoint July 2020 is our first digital monthly edition of Counterpoint. Each month we will add a new edition to this library to keep you up to date on our macroeconomic and market views.
Fullscreen

Seeing the world differently

Counterpoint July 2020 is our first digital monthly edition of Counterpoint. Each month we will add a new edition to this library to keep you up to date on our macroeconomic and market views.

This website uses cookies

We use functional and analytical cookies to improve our website. In addition, third parties place tracking cookies to display personalised advertisements on social media. By clicking accept you consent to the placement of these cookies.