Macro insights

A bridge to somewhere

The timing of widely available Covid-19 vaccines will be a key driver of the restart – particularly as the prospects for U.S. fiscal stimulus appear more limited. Fiscal policy must keep playing a key role to sustain households and businesses through the income shock, as monetary policy alone cannot generate growth. Yet the encouraging vaccine news strengthens our base case of a 2021 cyclical recovery – and may reduce the amount of fiscal support needed. This would also lessen the risk of long-term economic scarring as hard-hit industries swing back and hiring picks up. Investors and policymakers now know there is a bridge to somewhere. Also, there is no talk of fiscal austerity – a stark difference from after the GFC.

Sources: BlackRock Investment Institute with data from Haver Analytics, November 2020. Notes: The orange bars show estimates of discretionary fiscal measures in 2020 to offset the Covid-19 shock. The light orange bars show fiscal measures for 2021, based on estimates from brokers. The green bars show the estimated impulse of monetary growth in China, measured as total social financing growth minus local government debt purchases. There is no guarantee forward looking estimates will come to pass. 

Yet the latest Covid surge is likely to plunge the euro area economy back into contraction in the fourth quarter, with the U.S. not far behind. This will increase cumulative economic losses suffered compared to pre-pandemic levels – but we still believe the ultimate shortfall will be a fraction of what it was after the GFC.