State Street says the first stage of the “relay recovery” – carried out by central banks and governments – was a resounding success, and while recent outbreaks appear to threaten the second stage reopening, they might also force governments and citizens to get their head in the game.
“It is possible that these early experiences may encourage practices that will [help limit] the spread of the virus ahead of a potential second wave this fall, thereby boosting business and consumer confidence,” said State Street global chief investment officer Richard Lacaille. “Reopening experiences have also been far from universally negative, as many countries, regions, and localities have gradually restarted their economies while keeping COVID-19 cases under control.”
But while reopening has been “far from universally negative”, with many countries gradually restarting while successfully controlling their COVID-19 cases, there will not be a complete recovery without a medical solution to the virus.
“Ultimately, it will be challenging to sustain investor confidence through the end of the year unless the third stage of the relay – the development of a vaccine (or an effective, scalable medical treatment) – is accomplished so that the most vulnerable populations can benefit by the end of 2020 or early 2021,” Mr Lacaille said.
Pressure on personal incomes also threatens to derail the recovery as governments weigh the costs of providing more stimulus, while Mr Lacaille believes inflation risks are rising as the once-controversial modern monetary theory “essentially [becomes] the norm”.
“We don’t expect inflation to spiral out of control anytime soon, particularly in light of the deflationary forces that the pandemic has also unleashed, including accelerated technology adoption,” Mr Lacaille said. “Nevertheless, inflation uncertainty has spiked recently, and inflation does bear watching in light of this global sea change in monetary policy interaction.”
