History is littered with examples of large-scale crises ushering in new governmental, economic and social structures. In very recent history, the Global Financial Crisis led to an era of low interest rates and growth, and repeated central bank intervention. Now we think the Covid-19 crisis has the potential to spur its own set of changes.
How the crisis unfolds largely depends on the trajectory of the virus, the strategies used to exit from lockdowns, and how policymakers respond. As a result, we see three broad economic scenarios developing. The base case, to which we ascribe a 60 per cent probability, is a U-shaped recovery: this entails social distancing for the rest of the year and lockdown restrictions gradually being lifted throughout the summer. Policymakers will provide further support, both on the monetary and fiscal side, but given the scale of the challenges including falling inflation, high unemployment and a deep recession, this could lead to lasting changes in the economy creating a ‘New Economic Order’.
Read more...
