January 19, 2021

Kup

News Updates Everyday

Global economy on the threshold of a new era due to a pandemic

Global economy on the threshold of a new era due to a pandemic

Source: Jupiter

In 2020 the global economy has shaken its foundations and is still shaking under our feet. It’s hard to say where this will all end. Covid-19 vaccines could mark the end of the health crisis, but the damage caused by the pandemic is still affecting the global economy, say Talib Sheikh, head of strategy, and Mark Richards, strategist at Jupiter Asset Management.

Economic history has been marked by landslides, and the one we are witnessing today can be as drastic as that of 1971, when the gold standard was abandoned, or that when Fed President Volcker raised interest rates to 20% in the late 1970s.

Radical changes have already taken place

Two radical changes have already taken place. For one thing, most central banks in developed countries have adjusted their monetary policies, essentially accepting that they have a less robust model for how inflation will emerge.

In the past, interest rates were set based on where central bankers expected inflation in the future, but the link between growth, employment and inflation has weakened. There are so many doubts about how inflation should be projected that central banks are more reactive than proactive in setting interest rates and are likely to use increasingly innovative tools to meet inflation targets.

The second change concerns the level of government intervention, with the government effectively guaranteeing most bank loans since the beginning of the pandemic while effectively nationalizing wages for large sections of the workforce through job retention programs.

After the limits of what central banks can do with monetary policy are reached, the baton will be turned over to governments to fuel growth, which is vital for economies to recover from the pandemic. Aggressive fiscal and monetary policies are expected to go hand in hand in the years to come.

A new era that reflects the old one

For the first time since the 1970s, central banks have shown a willingness to focus less on inflation. There will be no return to the austerity measures of the last decade. A coordinated fiscal and monetary policy offers the best chance of bringing inflation back to a target level. These dynamics are likely to be the primary concern for investors in 2020 and beyond.

The pandemic is likely to go away in 2021, but it will leave another world. Many of the problems that plagued the global economy for the past decade, particularly over-indebtedness, have been exacerbated by the crisis. In response, central banks and governments have committed to increasingly innovative efforts to bring inflation and growth back into the system.

In this new world, no one can say for sure how these changes will play out. While the world will be a better place to live in 2021, returning to the pre-pandemic world is virtually impossible.


Views:
19th