Monetary and fiscal stimulus in response to the Covid-19 crisis has amounted to more than USD18tn in 2020, 1.3 times the Chinese GDP. But differentiated returns will create divergent recoveries. Our proprietary monetary impulse indices show the record high levels in the U.S., the Eurozone and the UK. However, China’s is still a far cry from the peaks reached after the 2009 financial crisis. Meanwhile, global fiscal support has amounted to USD10.4tn since March 2020 (12% of global GDP), ranging from 3%-18% of countries’ GDP. This along with the size of automatic stabilizers will shape the future recovery trajectories by country. Germany, the Netherlands, Switzerland and Austria are expected to recover faster, while Japan, the U.S., Spain, the UK and Italy are likely to need even more fiscal stimulus to compensate for the weakness of automatic stabilizers. We expect Europe to reach its pre-crisis GDP level only in late 2022-2023 while China and the U.S. would reach theirs one year earlier, depending on the management of the second wave. The key question remains the recovery support to come, along with the targeted relief support for the hardest hit sectors until the end of the year. With higher solvency risks in H2 2020 and 2021, we expect global insolvencies to increase by +35% in 2020-21.

Global trade is not expected to return to pre-crisis levels before 2023 as international flows in the services sector will remain impaired for longer. We expect a global contraction of trade by -15% in volume in 2020, with a recovery of +8% in 2021 and +4.1% in 2022. Export losses (USD4.5 trillion in 2020) will also reveal large asymmetries between countries and sectors. Service activities will take a much longer time to recover (2023 for travel and transportation services) compared with trade in goods, which is expected to return to its pre-crisis level by the end of 2022. We expect the energy sector to be hit the hardest (-USD733bn of export losses), followed by metals (-USD420bn) and transport services tied with automotive manufacturers (-USD270bn).

“Pavlovian markets” will generate a regime of high volatility. Reacting to announcements of expansionary monetary and/or fiscal policy, markets tend to be overly reliant on the effectiveness of policy measures. We continue to believe global equity is over-valued. For 2020, we expect 10y Bunds to finish the year at -0.5% and 10y USTs at 1.0%, slightly above current levels.  

In the medium term, we expect GDP growth to be impaired by the legacies of the crisis. We see an accelerating zombification of companies, banks and labor markets, a deterioration of social and political risk and definitive losses in terms of capacities of production. Compared to other developed economies, the U.S. is likely to lose -1pp over ten years mainly due to a large accumulation of public debt. While we don’t expect a trade regime shift (relocation/reshoring) in the short term, pre-Trump tariff levels are unlikely to return despite reduced U.S.-China trade uncertainty after the U.S. elections.