Pushing on an Open Door

COVID-19 is Intensifying Long-term Macro Trends…Especially Debt Overhangs

02 September 2020
3 Minute Read

What You Need to Know

The COVID-19 pandemic has had historic—and nearly immediate—repercussions for society, the global economy and policy. The aftereffects will last for many years, reinforcing long-term trends including deglobalization, populism and mounting debt. How will governments tackle the debt overhang—and how do these trends impact our macro views?

137%
G-7 gross debt as percent of GDP
based on 2020 International Monetary Fund forecasts
–3%
Annualized contribution from negative real rates
to reduction in UK government debt/GDP ratio, 1946–1980
–1.3%
Required effective nominal interest rate
to keep US government debt/GDP ratio at 2021 levels
Authors

By the summer of 2020, the world was six months into the COVID-19 pandemic. The first wave alone is more expansive—and global—than other 21st-century outbreaks, including severe acute respiratory syndrome, Middle East respiratory syndrome and even Ebola.

The economic impact of COVID-19 is already historic. To control spread of the virus, governments brought a sudden halt to economic activity with social distancing restrictions and shutdowns, causing massive labor-market dislocations. The scale of the public-health, monetary and fiscal response is simply unprecedented.

If these actions are successful, restrictions will eventually be lifted and economies should recover. But what happens after the initial bounce? Prior to the pandemic’s outbreak, we sketched out five long-term trends that we believe will drive an environment of weak growth, a deteriorating growth-inflation mix and, ultimately, a shift to higher inflation itself:

  • A negative supply shock from demographics
  • Weak productivity growth
  • Resurging populist policies
  • Rising geopolitical competition and conflict
  • A mounting debt overhang

Will COVID-19 reinforce these trends, counter them or have no effect? The pandemic has already ushered in major changes. For consumers, movies and airline travel are now off the menu, while for producers, densely packed workspaces are a thing of the past. Failed and bankrupted businesses and financial-sector impairment from collapsing asset prices and bad debt will not be uncommon. And even as restrictions are gradually eased, it may be a long time before people feel safe returning to “normal” behavior.

But the pandemic’s easiest path to influence long-term macro outcomes is where it’s pushing in the same direction as long-term trends that are already under way. Think of this as pushing on an open door.

COVID-19 Will Likely Intensify Deglobalization

Globalization is one of those open doors, given its apparent peak before the pandemic arrived. A simple way to visualize the globalization trend is by looking at the ratio of exports to gross domestic product (GDP). This ratio rose steadily as globalization made headway in the decades after World War II. More globalization meant more goods and services shipped outside national borders.

Since 2013, though, this trend has started to reverse (Display 1), partly because the global financial crisis (GFC) revealed flaws in global supply chains—notably the reliance on trade financing. Technology—automation, in particular—is pushing on the open door, too, by making onshoring production a viable option versus offshoring to low-wage-labor nations. And, of course, the institutional framework for free trade has been shaken by trade wars, due in part to a resurgence in populism.

The Ebbing Tide of Globalization
World Exports as a Percentage of Gross Domestic Product
The Ebbing Tide of Globalization

Historical analysis does not guarantee future results.
Through December 31, 2018
Source: HaverAnalytics

COVID-19 arguably pushes the open door for deglobalization even further, revealing more supply-chain flaws concentrated around single points of failure. Regions of the world that had been more globally connected or networked have felt a deeper impact. But this isn’t just about supply chains; indeed, escalating geopolitical conflict between China and the West in the wake of COVID-19 threatens to push the deglobalization door wide open.

Past performance, historical and current analyses, and expectations do not guarantee future results. There can be no assurance that any investment objectives will be achieved. The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AB or its affiliates.

The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.


About the Authors