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We are facing an unprecedented crisis: Almost 100% of businesses are affected the COVID-19 outbreak vs 60% in a « normal » recession.
Our baseline macroeconomic scenario is that we have entered into the worst recession since 1929 that will be followed by a U-shaped recovery. However, there are many downside risks to growth to keep in mind: weak global aggregate demand due to the hysteresis effect, tourism will not get back to normal before 2021-22 (it represents more than 15% of direct GDP contribution in Spain, Portugal and Greece), the risk of solvency is increasing fast in the service sector paving the way to a wave of bankruptcies.
Policymakers will implement new policy innovations to mitigate social discontent (UBI), deal with the increase in debt (MMT, monetization and YCC – Yield Curve Control to limit the appreciation in interest rates) and will also resort to old tools (such as higher taxation).
We are at the beginning of a regime shift back towards the 1950s characterized by “big government” and ultra-loose monetary policy (“lean against the wind” monetary policy). Higher inflation is becoming a real long-term risk that could be amplified by de-globalisation forces, debt monetization and the redirection of value chains.
Governments will stop using nominal GDP and will refer to well-being indicators.