Macro Presentation : Looking beyond the storm
Head of Macro Analysis
Summary: This is my first macro presentation to clients since the coronavirus outbreak. I think it provides a clear assessment of what have been successfully done by policymakers since early March, what are the challenges lying ahead, and how should investors proceed in this very unusual bear market rally.
If you want, you can also skip the slides and go directly to the conclusion:
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.
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Outrageous Predictions 2023: The War Economy
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Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
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A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
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Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.