The Bumpy Road to a “Day After” Renaissance

The pandemic has altered the picture we had at the end of 2019. Covid-19 has sent us into deep, global economic contraction bottoming out in the end of 2Q2020. A rebound will take place in 3Q2020. Thanks to policy boosters, we will progress into a sequencing recovery with divergences across and within regions. We expect EMs to converge to pre-crisis GDP levels in 2Q2021 while for AEs we have to wait for the end of 2022.

In this environment, growth, rates, inflation, monetary and fiscal policies are strongly interconnected. The potential mismatch of one could affect the overall results. We expect ultra-accommodative monetary policies to persist, leading to stable and low-interest rates worldwide. Strong demand from central banks will cap yields, while the recalibration versus the short end of the curves will ease tensions in the long end. In fact, governments are financing the emergency with short-dated issuance. Central banks’ purchasing programs and state guarantees are supporting spreads, in an attempt to safeguard default rates, at least in the short term.

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