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The policy revolution was needed to cushion the devastating and deflationary impact of the virus shock. In the medium term, however, the blurring of monetary and fiscal policy could bring about upside inflation risks.
Filling in the gap
Estimated virus hit to GDP vs. offsetting policy measures, 2020
* The euro area is represented by averages of Germany, France, Italy and Spain.
Sources: BlackRock Investment Institute, with data from the Federal Reserve, ECB, BOJ, BOE and Haver Analytics, June 2020. Notes: The chart shows the magnitude of the negative shock (orange) and the associated positive policy response (yellow) as percentages of GDP. We use estimated 2020 targets for the U.S. and euro area central bank purchases and lending programs. The euro area includes the ECB’s Targeted Longer-Term Refinancing Operations. The UK includes central bank support for the Term Funding Scheme.
View our Midyear Outlook in charts
Bottom line: The policy revolution was essential. It is a near-term positive for risk assets – but is unlikely to be the prelude to the type of policy-driven, decade-long bull market that followed the global financial crisis.
Strategic implication: We are underweight nominal government bonds and like inflation-linked bonds.
Tactical implication: We like credit, partly on central bank purchases. U.S. stocks are at risk of fading fiscal stimulus.