The private sector costs of COVID-19

The immediate costs of the COVID crisis will be shouldered more by governments than the private sector. However, as fiscal support recedes in the coming years, a greater share of the costs will be borne by households and firms, and ultimately by their creditors. Our base case is that loan losses will not be big enough to destabilise banking systems, but some economies, particularly in the emerging world, are more vulnerable than others. And even in countries where banking systems are on a surer footing, losses are likely to be big enough to act as a brake on lending, as banks work to maintain or restore capital buffers.
Simon MacAdam Senior Global Economist
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Recoveries regaining pace after slow start to the year

Global GDP growth slowed sharply in Q1 as most parts of the world grappled with renewed waves of coronavirus. The US and Korea were among the few exceptions where recoveries accelerated. But with global infection numbers now falling, activity seems to be gaining momentum again. The Global Composite PMI rose to its highest level since April 2006 in May. What’s more, our high frequency COVID Mobility Trackers suggest that activity has risen sharply, particularly in Europe, as restrictions have eased. Other than in particular sectors such as motor vehicle production, there is little evidence so far that recent supply shortages are holding back output. But there are growing signs of inflationary pressure around the world, most notably in the US. Fears of higher inflation should prompt numerous central banks in emerging economies – especially in Central & Eastern Europe – to shift towards tighter monetary policy in the coming quarters. But central banks in major DMs will look through higher inflation this year and next.

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How concerning is the recent rise in inflation?

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10 June 2021

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G7 tax deal encouraging sign for cooperation among DMs

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How far will rising commodity prices boost inflation?

We think that the broad-based rally in commodity prices will go into reverse later this year, so the upward pressure on inflation in advanced economies should be temporary. But there is a clear risk of a more sustained pick-up in inflation, especially if shortages persist. Drop-In: Great Inflation 2.0 – Are we facing a 70s revival? (1100 ET/1600 BST, Thurs 13th May) A special 20 minute briefing during which Jennifer McKeown, the head of our Global Economics Service, and Senior Global Economist Simon MacAdam will discuss whether advanced economies are in for a repeat of inflation levels last seen during the 1970s. Register here.

12 May 2021

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Great Inflation 2.0? Lessons from the 1970s

Policy stimulus and tolerance of inflation by central banks may lead to higher inflation in some G7 countries in the coming years. Given the parallels with the run-up to the high-inflation era of the 1970s, it is natural to be worried about history repeating itself. While we accept that medium-term inflation risks are probably skewed to the upside, the lessons from history suggest that the chances of a Great Inflation 2.0 are low.

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A closer look at ‘excess’ household savings

Income support and limits on spending had already led households in advanced economies to build up almost $3.5tn in extra cash by the end of 2020, equating to 7.6% of GDP. And the stockpile of these supranormal savings will continue to grow in 2021. We suspect that this money will be used to pay down debt and invested rather than spent in a hurry. Financial investment will support asset prices, while lower debt burdens will strengthen household finances, potentially supporting growth further down the line.

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