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30.04.2020 18

Contraction > recovery > late cycle: a cycle round trip in three years


30 April, 2020

5 to 10 minutes
Contraction > recovery > late cycle: a cycle round trip in three years

30 April, 2020

5 to 10 minutes

The essential

The pandemic outbreak altered the cycle of financial regimes we had in mind at the end of 2019, with consequences extending over the medium term: after a sharp contraction in 2020, 2021 will see a “recovery” in the growth and profit cycle with a rebound in risky assets while in 2022, we expect a normalization towards a late cycle.


Macroeconomic backdrop

The geographical impact of the pandemic has extended globally over time, quickly evolving from an external shock to trade dynamics sourced in China to an endogenous shock of collapsing demand in most countries experiencing forced shutdowns.

While different timelines of the outbreak and related containment measures suggest a jerky recovery, with the risk of possible setbacks should a second wave of epidemic/lockdown occur, single economies are facing double shocks, both domestic and external.

Real GDP growth is expected to fall Q1/Q2/Q3 2020 hit by the pandemic and global economic lockdowns.

On the inflation front, the mix of lower oil prices and weaker prospects of global growth suggest a shallower path for inflation across the globe in the near term, with widening output gaps slowing the pace of core inflation, and lower oil and commodity prices providing a drag on headline inflation.

Because the peculiarities of the economic fallout, targeted fiscal, monetary, and financial market measures are being deployed to support affected households and businesses domestically.

Monetary policy across the globe has swiftly responded to the emergency, tackling the situation with new tools and instruments, acting to provide liquidity to markets and the financial system. The Federal Reserve has cut its main policy rate back to zero, using all its firepower on rates, cutting by a cumulative 150 bp, while providing coverage of huge fiscal needs through unlimited QE. The ECB took several steps and ultimately delivering a strong package. It acted on preannounced targets, providing ample liquidity to the financial system, and delivering a huge increase in QE2 and de facto ceiling intra-EMU spreads, and providing support to governments’ higher funding needs.

The fiscal response has been sizable in most advanced economies, and many emerging markets economies have also begun announcing significant fiscal support for sectors that have been hit. Measures aim at reducing the impact on the hardest-hit households and businesses, while preserving economic relationships and activities as the pandemic outbreak forces lockdowns. The size of tools depends on the fiscal room available at the national level, although in the Eurozone a more coordinated effort is gradually shaping up.

Investment Phazer medium-term implications: a contraction followed by a recovery supported by massive policy coordination and eventually a late cycle, or potentially asset reflation, should central banks continue to expand their balance sheets. The first phase is characterized by a preference for cash, Govies, IG under the central banks’ and gold.


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