Global economy: Economic development after COVID-19

Global economy after COVID-19. The impact on the global markets.

In which direction will the global economy go after the COVID-19 shock? And which trends will shape economic development on the global markets after the pandemic? Read the analyses of Credit Suisse's financial experts in our Outlook.

The pandemic has led to volatile economic development

2020 will go down as a historic year with a truly unique economic trajectory. The deepest quarterly global gross domestic product (GDP) contraction on record in Q2 as a result of the first wave of the COVID-19 pandemic was followed by the sharpest quarterly rebound on record the following quarter as the lockdown restrictions were eased and fiscal and monetary stimulus kicked in.

Rapid recovery of the global economy following the coronavirus shock

Following the shock, the global economy showed a strong recovery

Last data point: 30/06/2020
Source: Bloomberg, Credit Suisse

The upheaval caused by the pandemic has consequences for the global economy

A shock like the COVID-19 pandemic also influences productivity. In the longer term, it may improve in some sectors at least, since the lockdown has created plenty of disruption, which will likely boost new business models such as online medicine and new ways of working. There will be short-term costs to these disruptions, but emerging business models can generate efficiencies in the long run.

While the effects of the pandemic should help keep inflation in check in 2021, the long-term consequences of the crisis on inflation are less clear. Over time, ballooning budget deficits and public debt are likely. This destabilization of public finances can lead to inflation, but only if central banks are ineffective or inactive in responding to future inflation pressure. For now, it is too early to assess such tail risks, but investors should stay attentive to the sustainability of public finances.

Real returns on global markets compared to inflation rates

Following the shock, the global economy showed a strong recovery

* Percentiles of inflation across 2516 country-years; bond and equity returns in same year
Last data point: 31/12/2019
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, DMS dataset. Not to be reproduced without express written permission from the authors.

How the COVID-19 pandemic will change the global economy

Crises often become a transformative force. The coronavirus crisis is also likely to have long-lasting consequences and accelerate existing trends. Acting now with a view to the world after COVID-19 can help minimize the likelihood of another pandemic-driven global crisis. It can also provide an opportunity to address issues that have undermined growth. The following trends are likely to shape the future:

1 Inflation tail risks

The benign inflation regime of past decades will persist in the medium term, but deflation and inflation tail risks have grown.

2 Multilateralism 2.0

Multilateralism is either reset and reformed or will cede to multi-polarism as a result of US-China interactions.

3 Democracy/Autocracy

Both can fail or thrive in a pandemic as crisis management, state capacity and citizens’ trust matter more than political systems. Both will continue to co-exist.

4 Big state

Governments’ expanded powers will outlast the crisis, initiating desirable changes but also increasing the risk of undermining market dynamics and individual responsibility.

5 Nearshoring

Globalization will not reverse but slow further, with more emphasis on regional diversification, nearshoring of production and resilience rather than cost efficiency.

6 Surveillance

Surveillance and personal data collection now enable states and companies to become information empires. Comprehensive privacy protection is crucial.

7 Work

Remote work is here to stay, fostering an even broader flexibilization and new standards in the world of work.

8 Education

Lifelong learning will become a key part of everyone’s life to create an adaptable workforce and develop skills that stress human advantage over machines.

9 Inequality

Inequality will remain a great focus and possibly initiate more redistributive taxes, triggering people and capital flows in response.

10 Decentralization

Cities will survive but adapt, leaving room for more regional decentralization and a renaissance of small towns in the developed world.

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