The key themes and risks our House View team expect to drive financial markets.
17 minute read
From a purely macroeconomic point of view, 2020 will go down as one of the strangest years ever. The COVID-19 crisis has resulted in the largest declines in GDP outside of periods of war or the Great Depression, the biggest economic revival ever (Figure 1) and the most remarkable monetary and fiscal policy responses since the 1930s. As the year comes to an end, there is still considerable uncertainty about both the path of the virus and regarding prospects for economies around the world. Although many nations are currently experiencing worrying second waves of virus infections – which are again being countered by explicit and specific containment measures which will hurt growth – we believe that economic recovery will still be a key theme throughout 2021 and well beyond.
Figure 1. Wild swings in GDP growth in 2020
Quarterly GDP growth in 2020
There are upside and downside risks to the outlook, a number of which we discuss below, but it is highly likely that next year will see some of the strongest annual growth rates for GDP in the last forty or fifty years. Our central scenario (which we have labelled B) envisions that global GDP will grow by in excess of six per cent in 2021, which would be comfortably the highest in the post-war period (Figure 2). The only reason that such an outcome is not being explicitly described as a boom or even a bubble is that it comes after the most extraordinary swings in GDP everywhere. Even in our downside scenario, GDP is expected to grow by around five per cent next year. In the more upbeat scenario, it reaches eight per cent.
Figure 2. Biggest fall, biggest rise in world GDP
Global GDP growth
The exact form of the economic recovery that transpires will depend in substantial part on three things: the pattern of virus transmission and its impact in terms of case numbers, hospitalisation rates and mortality rate, the various policy reactions to those patterns and the manner and speed with which the assorted vaccines are disbursed. All can and will vary across different regions and countries, but it is highly likely that there will be much in common. Currently, many nations have been experiencing significant second waves of infection as it has become apparent that increased social interactions that followed earlier easings of restrictions on activities resulted in the infamous “R” number of the COVID-19 virus rising much more quickly than had been expected.
The renewal of containment measures in October and November will cause further falls in GDP in Q4 of this year in many countries. But the impact is expected to be far less significant than in Q2 2020 because people and firms have learnt to adapt, the measures are more targeted and localised and many areas are much less affected – schools, universities, the construction sector and many manufacturing industries for example. GDP declines of perhaps two per cent to four per cent in Q4 are to be expected in affected countries.
The pattern thereafter is less obvious. The dynamics of the virus, containment measures and vaccines complicate the picture for 2021. It is already clear that renewed restrictions have worked – virus numbers have fallen again across Europe. But with the Christmas holiday period approaching, that could easily reverse again in December and January, obliging authorities to re-introduce such measures if indeed they had eased in the first place. It may be that countries choose instead to adopt a more cautious approach than in the spring and summer and maintain at least some restrictions throughout the winter months.
The motivation to do this is enhanced by the knowledge that vaccine deployment programmes are imminent. As more of the population is vaccinated – especially key workers and the most vulnerable – then the COVID-19 dynamics switch again and worries about opening up economies reduce significantly. In practice, this will mean that the economic recovery – assured as it is in our view – could become more stretched out during 2021, rather than being concentrated in one single short period of time as it was in Q3 this year. Caution may mitigate against a “going for growth” attitude from Governments, but it is also important to remember that the earlier experience from lockdown did reveal a great deal of ingenuity from economic agents in terms of maintaining or returning to economic activities and also the practical reality of a sharper than expected rebound when conditions allow. The bottom line is that we expect robust growth everywhere during the course of 2021 (Figure 3). Economic recovery will be one of the dominant – and welcome – issues of the day.
Figure 3. After some Q4 setbacks, recovery should resume in 2021
Quarterly GDP growth projections
Monetary policy has been through a number of different eras over the last century, often alternating between extended periods of calm and comparatively slow evolution and short periods of rapid change and sometimes blunt revolution. After the high-inflation 1970s and 1980s, many central banks were mandated to address the problem and their inflationtargeting aims and credentials were a key aspect of the period from the early 1990s to the mid-2000s that became known as the “Great Moderation” (Figure 4). Low, but positive inflation was generally achieved, on average, most of the time. Japan was a slight exception and provides an example, in the eyes of many, of what could happen if you let deflation take root. In the wake of the Global Financial Crisis, the same central banks became pivotal in providing a range of more unconventional monetary policy assistance, the most important of which was quantitative easing. These changes were not welcomed by all and were pronounced by some sceptics as sowing the seeds of future inflationary disasters and creating a drug-like dependency within some financial markets on continual monetary policy fixes. The latter accusation is still unproven, while the former has been largely discredited – at least so far.
Figure 4. G7 CPI inflation is low but still positive
G7 countries: annual CPI inflation
We now seem to be entering another period of significant change for central banks and monetary policy in general. As we stated three months ago, they have been struggling with the challenge of seemingly ever-lower equilibrium or neutral real rates of interest for some years now (Figure 5). In addition to the specific requirements brought on by the two global crises since 2007 (three if you count the European sovereign debt crisis), many have argued that their over-zealous anti-inflation bias, alongside the trend lower in real rates, has led to them being constantly late in a game of policy catch-up, with rates never moving low enough to bring about the desired outcomes. Although the Fed in the US has not been the worst offender in terms of achieving a two per cent inflation target (Figure 6) – far from it in fact – it has been a pioneer in terms of introducing some new approaches to policy over the last year or so. Specifically, it has recently moved to an average inflation target (AIT) regime, whereby periods of below-target inflation can be explicitly followed by periods of above-target inflation.
Figure 5. Neutral real rate has been falling since the mid-80s
Crude estimate of 10-year real interest rate, G7
Figure 6. US core PCE inflation
In today’s circumstances, this effectively means that, from the Fed’s point of view, the US economy can be “run hot” in order to allow inflation to rise from present subdued rates (on average) so that the overall target is achieved on average rather than at every point in time. More generally, it has also invoked changes that mean it can be reactive rather than preemptive as far as inflation is concerned. Although it has moved more slowly, as is traditional, the ECB – which has been a serial inflation under-achiever – has hinted heavily that it will move in the same direction and will formally do so at the conclusion of its own strategic review next September. Other central banks around the world are likely to come under pressure to follow suit. The bottom line is that this monetary policy re-boot has the potential to change the inflation landscape for good. Of course, simply announcing a reformulation of inflation targets does not automatically make it more likely that you will achieve them. But it does add even further weight to the “lower for longer” thesis on monetary policy in what could in the end be a highly significant change in the ways that central banks around the world operate.
Fiscal – from support to stimulus
Fiscal policy has come to the party in 2020. It had to. If it hadn’t, it is certain that the economic impact of extended shutdowns of large swathes of economic activity during the year would have had far, far worse consequences. This is true whether we consider just the short-term direct impact of fiscal handouts or the longer-term protection that has been provided to many companies and individuals as governments attempt to nurture both so that they can return to normal activities when circumstances allow. The value of the latter course of action will only become apparent once economies re-open more fully and people can return to and resume their previous work. The principles are quite simple: shutdowns are necessary to stem the spread of the virus; organisations would quickly go bust and jobs would be lost forever if incomes that had previously been earned are not replaced; the government must step in to do just that, absorbing the risks that the private sector cannot until a time that they no longer require public sector financial life support.
At the peak of the first wave of the crisis this year, over one quarter of the workforce in OECD countries was estimated to be participating in job retention schemes (Figure 7). In times of war, no questions are asked about the need for vast amounts of public sector spending, whatever the impact on budget deficits and public debt. Because of the COVID-19 crisis, the same should be true today. And by and large, it is. Deficits have soared higher (Figure 8) but there has been a general acceptance that this, and the resulting lurch higher in key public debt ratios, is the right thing to do. Indeed, that former bastion of fiscal rectitude, the IMF, has gone to great lengths to stress that one of the greatest risks to the global economy would be premature withdrawal of fiscal support.
Figure 7. Take-up of job retention schemes
Participation in job retention schemes reached one-quarter of employees
in OECD countries, and more than half in a few countries
Figure 8. Fiscal deficits soared wider in 2020
Change in G20 deficits, 2020
Resurgent virus infections around large parts of the world imply that critical fiscal support, as described in the paragraph above, is going to be needed for some time yet. Renewed shutdowns mean that lost incomes will continue to need to be replaced if more adverse longer-term consequences (with many, many second-round effects) are to be avoided. There will be a time for a fiscal reckoning, but it is emphatically not now. Gradually, as first control over the virus is regained – we hope – and secondly as vaccine disbursement is rolled out more comprehensively, it will become appropriate for the blanket coverage of fiscal support to become more nuanced. At that stage it will be possible to modify fiscal programmes, adapting them to be more closely targeted. It will also be possible to monitor such expenses better. During the emergency phase of the pandemic, a “whatever it takes” approach was desirable – essential even. And since the virus is still with us, and is likely to be so for some time, it is right to defend and endorse that approach at those times. But the situation is evolving here too and as the recovery progresses, it will become more appropriate to shift from fiscal support to fiscal stimulus. A combination of both will be needed, but the balance is likely to change as the recovery progresses.
Both the IMF and the OECD have recently added their voices to the call for countries around the world to take advantage of the opportunity presented by the COVID-19 re-set to redefine the policy agenda for the future. There are several aspects to this, but they include climate change and green issues, a drive to reinvigorate world trade and multilateralism in the post-Trump era, the global digital and technology debate and public sector investment programmes more generally. On this last point, there is a powerful argument that governments around the world can help influence and underpin this recovery through public spending initiatives. Many are making the case that there can be no better time for governments to borrow long term, at exceptionally low rates, and to invest in public infrastructure projects that can support or boost potential growth in the future. These will include not simply traditional capital investment in transport and housing, but also in health care, education and digital and environmental infrastructure. In the post-COVID-19 world, it is difficult to argue against the idea that active fiscal policy has the potential to frame recovery and impact the future in a lasting and meaningful way.
The Eurozone has had a turbulent 20-year history and has not always made timely or coherent decisions. Shortly after the Global Financial Crisis (GFC), the Eurozone experienced its very own disaster in the form of the sovereign debt crisis. At the low point there was a genuine existential threat to the single currency project. It seemed inevitable that Greece would leave and most of the debate revolved around how many others would follow. In the end the Eurozone not only survived that crisis but used the despair which surrounded it as a catalyst for critical progress and change. The COVID-19 episode is now starting to look similar, bringing out at different times both the best and the worst of European politics. At the onset of the pandemic, it looked as if Italy – the epicentre of the first wave of the virus in Europe – might be left to deal with the consequences, effectively on its own. Some of the old familiar fracture lines centring on national responsibility and sovereignty seemed to be resurfacing. But as the indiscriminate nature of the virus became more apparent, member states swiftly regrouped and presented a coordinated and united front. As long as that solidarity can be maintained, improved unity among Eurozone member states can be one of the defining themes of the investment backdrop in coming years.
However, it would not be the Eurozone without some bumps along the way. The design and presentation of the Recovery and Resilience Fund in the summer was a key moment, if not quite the “Hamiltonian” one, as many had characterised it. Such a development would have been unthinkable ten years ago and illustrates the progress that has been made on the long journey to closer integration. The €750bn fund comprises both loans and grants (Figure 9) and although ostensibly temporary – its genesis was as an emergency facility which would allow financial assistance to get quickly to those most affected by the COVID-19 crisis – it contains within it ground-breaking elements such as common debt issuance and de facto large-scale transfers within the region. The latest spat with Poland and Hungary regarding commitments to “rule-of-law” standards risked delaying and diluting further progress, but a compromise seems to have been reached. Initiatives such as the Recovery Fund, which are pivotal to any meaningful transition towards greater fiscal and political integration, cannot afford to lose momentum. While there are clear dangers of further compromises and delays, we believe that the political will within Europe will eventually triumph.
Figure 9. Grants directed to those most impacted by the virus
EU stimulus for members’ economies
It is also worth noting that fears Brexit might result in growing tensions and disharmony among other EU members (those in the Eurozone in particular) have so far proved unfounded. Quite the opposite in fact: the battle with a common enemy has – like that with COVID-19 – seemed to bring them closer together. Helped by less capricious governments in Spain and Italy in recent years, the big four within Europe have become a more cohesive unit seeing greater agreements than differences compared to the past. The Franco-German axis, in particular, has seemed stronger and more coordinated. Whatever the exact reality in the corridors of European political power and within households across the region, there have been discernible moves in the direction of closer European unity in recent years and financial markets have, by and large, reflected that. The currency has strengthened in 2020 (Figure 10), and peripheral bond spreads have narrowed significantly. The GFC might have exposed the folly of no spread at all, but if greater cohesion lasts as we expect it to (and that should prove easier in a coordinated economic upswing) then European unity should strengthen too.
Figure 10. The Euro has appreciated since the start of the pandemic
Eurozone exchange rates
It has been five years since the global community met in Paris to agree a plan to reduce greenhouse gas emissions and limit the increase in global average temperature to well below 2 °C above pre-industrial levels; and to pursue efforts to limit the increase to 1.5 °C. That agreement left each country/bloc to determine the extent to which they could reduce their own emissions (Figure 11) and the policy actions needed to deliver that outcome. But it did require signatories to communicate nationally determined contributions (NDCs) – targets for 2030 – at five yearly intervals. The intention was to ratchet up ambition over time and align actions with long-term visions (mid-century and beyond). Those longer-term strategies have taken centre stage in recent months, with a flurry of new net-zero announcements. As we look forward to 2021, and the Glasgow COP26 meeting, parties will once again convene to review and accelerate actions towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change. Ahead of that meeting, we expect many more countries to strengthen their NDCs.
Figure 11. Per capita emission, fossil carbon dioxide (CO2)
Metric tons of CO2 equivalent
Plans and actions to deliver those 2030 commitments will follow, e.g. building on the 2019 Green Deal agenda, the EU is seeking to pass a range of new regulations in the first half of 2021. These include a significant expansion of the current Emissions Trading Scheme (ETS) to include more industries, as well as limiting the cap to further increase the price of carbon. European proposals also include a border carbon tax adjustment to reduce the risk of “carbon leakage” should the rest of the world not move at the same pace as the EU in raising the price of carbon – in effect creating a global carbon price for countries that trade with the EU. There are also a range of green investment initiatives that have received increased funding through the EU budget and the COVID Recovery and Resilience Fund. These funds will be used to develop new, green, technologies and to help with the transition away from carbon-intensive energy production and consumption.
In the United States, the new Biden administration will bring the country back into the Paris Agreement and pursue a range of new initiatives to help deliver on that. Those are likely to include a range of new restrictions on emissions, but (assuming the Republicans hold on to the Senate) are unlikely to extend to a national ETS or large subsidies for renewables. Meanwhile the UK government has also committed to a raft of policy measures to reduce carbon emissions, such as a commitment to improve building efficiency in homes and workplaces, a significant part of the country’s annual carbon footprint. Key emerging market economies are also set to make important announcements. With the release of the next five-year plan in March, China will begin to set out how it intends to deliver its transformative pledge to reach net zero carbon emissions by 2060.
These policy measures, if introduced, are more wide-ranging and impactful than anything seen thus far. They will have profound implications for individual businesses, industries and countries. Those that are better placed to manage the transition impacts of these policies, through effective planning and deployment of capital, are likely to be relative beneficiaries. But there will clearly be some that will face a greater challenge than others, e.g., within the EU the annual per capita carbon emissions range from just 4.5 tons in Sweden to over 8.5 tons in the Germany. Much of that difference reflects different sources of power generation (largely renewables vs significant coal and gas).
While at the company level, the Taskforce on Climate-related Financial Disclosures (TCFD) will require more transparency on the impact of corporate activities on, and by, climate change. Those who are best placed to manage the policy transition through their own footprint, as well as upstream and downstream activities, should be more attractive investment opportunities. Finally, the asset management industry is also undergoing regulatory and client-driven change, with increased focus on strategies and portfolios that are consistent with the targets in the Paris Agreement. We expect to see increased inflow into these strategies, which will also impact the price of the underlying building-blocks (Figure 12).
Figure 12. Number of launches of new ‘climate aware’ funds
There was a time before COVID-19 when financial markets worried about other things. Simmering hostility between China and the US as a result of the Trump trade war dominated sentiment for the two to three years preceding the pandemic (Figure 13). That long-running dispute had appeared to be coming to an end in the form of a Phase 1 trade deal, but the onset of the virus thwarted a clearer resolution. World trade flows have collapsed twice in the last 12 years, but have rebounded each time (Figure 14). With Trump now departing, rather reluctantly, hopes were expressed in some quarters that frozen international relationships can now thaw and be replaced by more constructive liaisons. However, it should not be assumed that a Biden White House will immediately be more conciliatory in its dealings with China. In many ways, the trade spat was really a symptom of broader trends between the two global superpowers and also of other geopolitical relationships beyond that main axis. It is not only the US that is unsatisfied with the manner in which China is engaging with the rest of the world. But what is arguably more likely with the incoming Democratic administration is a return to more globally coordinated, multi-lateral approaches to international diplomacy.
Figure 13. Bank of America Merrill Lynch Fund Manager survey
Table shows biggest tail risk in survey responses
Figure 14. CPB World Trade Monitor, Total, Volume, SA, Index
Some of the more inward-looking opinions may have been hardened by the COVID-19 crisis, but it is hoped that as that moves into history and as recovery takes hold, attitudes will soften and become more constructive than confrontational. Even so, it seems inevitable that future years will still be characterised by strategic competition, largely related to China and the US, but also impacting many others. One key aspect is the race for technological global dominance. But really the heart of the matter relates to forced technology transfer, intellectual property theft and free market distortions. Beyond those specific issues lie others such as China’s human rights violations, their influence in Hong Kong and Taiwan and the desire among other democracies that China complies more with international codes of practice that are broadly accepted everywhere else.
This is unlikely to be a smooth journey. As China’s international influence has grown, it was always likely that they would challenge global standards and institutions and try to impose alternatives. Achieving technological self-sufficiency is one thing, but China has ambitions for much more and there is nothing wrong with that per se. However, if China is to succeed as an integrated global player, a balance will have to be found between their fundamentally different methods of operation and adherence to acceptable international codes of conduct in business and trade. Strategic competition between China, the US and others is likely to frame international relations and influence financial markets over the next decade or more.
Balance sheet vulnerabilities
Generally speaking, financial crises and recessions – both in their origination and consequence – can be linked to balance sheet weaknesses in some part or parts of the economy. The COVID-19 experience has been a little different. Yes, some private sector balance sheets have weakened, but that has effectively been imposed on the sectors affected by measures put in place for sound medical reasons. The transfer of resource from public to private that has followed has relocated that “vulnerability” to the government sector and the legacy of it will be there for years – perhaps even decades – to come. In one very important sense, this is entirely appropriate – the public sector is far better equipped to cope with the consequences of the shock. History reveals many episodes of public debts spiralling higher (Figure 15), but most have corrected themselves or been corrected by subsequent actions. Granted, the processes by which that has happened have been many and varied.
Figure 15. We’ve been here before — in some places
Historical patterns of general government debt
The global pandemic has shown that, even with the extensive support of public funds, many corporate balance sheets around the world are bound to be more stretched after enforced shutdowns. There will inevitably be a delicate balancing act as funding schemes are withdrawn, which could expose the vulnerabilities of some. The fundamental health of public finances has taken a severe hit from the measures taken and those countries where there were already fiscal vulnerabilities, could be pushed closer to the edge (see below). Finally, several EM nations are seeing the now gruesomely familiar virus trends, but many will not have the financial resource or the political resolve to take steps that other, wealthier nations have been able to take. There is a risk that the COVID-19 experience reveals balance sheet weaknesses in specific countries that had until now remained hidden.
Taxing and regulating international businesses have always been areas of extreme complexity and dispute. Increased globalisation in the post-war period has contributed to capital becoming exceptionally mobile internationally, able to respond quickly to differences in incentive structures around the world, especially in the areas of tax and regulation. Increasing digitalisation of large parts of our economies is now focusing the debate on these sectors and could have important ramifications in many areas. Change is happening fast, and policymakers are struggling to keep up. There is a danger of arbitrary, hurried or piecemeal approaches that could disrupt affected industries significantly. It is difficult to generalise as these areas are often characterised not only by abstruse levels of complexity, but also by sometimes abstract concepts and elusive definitions of activities or processes. Designing appropriate and workable solutions to tax and regulation is therefore not an easy task.
Moreover, there is a risk that policymakers move away from sound principles on both because of a political expediency. What does seem clear is that organisations with a significant digital or on-line presence will face heightened scrutiny and greater intervention from competition authorities. They will also be under growing pressure to comply with increasingly detailed consumer protection laws. Finally, there is the issue of national versus international initiatives. The OECD is attempting to coordinate an international approach, but has been hampered by not knowing the US stance until the new administration takes office. It is hoped that 2021 will see some meaningful and constructive progress. But there are many doubts. Is a global digital tax even possible – or could it be abandoned in the name of international competition? And could others follow France? Last year they imposed a three per cent levy applied on the revenues earned by international tech giants in France, but postponed collection while OECD negotiations took place. The lack of visible progress has led them to demand payments from this month.
As we have already mentioned, in the wake of the GFC there were fears that inflation might make an alarming comeback. These worries, which proved unfounded then, betrayed a fundamental lack of understanding about the monetary transmission mechanism, failing to recognise that the additional money creation which resulted from QE programmes around the world was essentially replacing the usual means by which it was generated. The global banking system was, if not broken, severely compromised and the standard practice of credit creation was simply not happening. Today, although inflation is very low in most places, there are better theoretical grounds for believing that it could return over the longer term (Figure 16).
Figure 16. Monetary growth has picked up everywhere
There is still considerable debate on how monetary economics works in practice, but at the simplest level, a credible argument can be made that, when there is spare capacity, as there is today (and as there was in the wake of the GFC), stronger monetary growth impacts quantity variables more than price ones. Thus, in those circumstances, it helps contribute to stronger growth and the elimination of negative output gaps rather than results automatically in higher inflation. This is the aim of monetary stimulus today and with pre-COVID-19 levels of activity not expected to be regained until late 2021 or 2022, any inflationary impulse should be minimal until then. But beyond that, with monetary conditions so loose and central banks adopting a more relaxed approach to inflation, it is not unreasonable to imagine that inflation pressures might start to emerge. And if financial markets start to believe that is a plausible possibility, they may worry about it a bit more.
Pricing for perfection
We are optimistic about the ability of the global economy to recover from the COVID pandemic in 2021. Policy makers have been responsive to the crisis, supporting households and businesses. Those same households and businesses have shown themselves to be resilient to the circumstances and willing to adapt. While the news of a highly effective set of vaccines being ready for distribution in early 2021 suggests that uncertainty about the future should subside. Our central scenario for growth is above consensus across the major economies. However, we are conscious that the expectation for a rapid recovery in global growth in 2021 is almost unanimous amongst market participants.
Similarly, expectations that a favourable growth backdrop will support risk assets, including a rotation to cyclical and value stocks, as well as commodities, high yield credit, emerging market currencies and other cyclical asset prices are widely held. These expectations may have already been well discounted in some assets. In particular, the sharp move up in some risk assets in November 2020 suggests that the news on vaccine trials led to a rapid covering of short or underweight positions. There was also perhaps an element of fear of missing out in the pricing out of the pandemic downside risks. As such, some parts of the market may now be “priced for perfection”, when that outcome is rarely what eventuates, e.g., some parts of the equity growth sector, such as technology, look to be particularly expensive (Figure 17). But more generally, we observe that in recent years periods of market exuberance have often been followed by an extreme, but short-lived spike in volatility stemming from market corrections. The trigger for such corrections has been highly unpredictable.
Figure 17. A number of metrics are pointing to a risk of setbacks
The unprecedented assistance that was provided in response to the COVID-19 crisis was absolutely essential. And as experts everywhere are falling over themselves to emphasise, one of the most significant risks today would be the premature withdrawal of that support. But the measures taken are not without fiscal consequence, and that is something that has to be acknowledged and recognised. Budget deficits are expected to rise to 10 per cent, 15 per cent or even 20 per cent of GDP this year and although they are expected to narrow in coming years, the improvements pencilled in are relatively modest by historical standards and largely attributable to the anticipated strong growth in GDP rather than explicit fiscal tightening. Public debt in most countries will rise by up to 20 percentage points of GDP, perhaps even more (Figure 18). Ordinarily, the fiscal loosening implied by these headline numbers would have been met by clarion calls for austerity by the political right (although they wouldn’t use that word these days). There is a reluctant acceptance that largesse has been vital.
Figure 18. Gross debt, IMF fiscal monitor, estimate, per cent of GDP
However, today’s exceptional circumstances do not change the realities of fiscal sustainability over the longer run. And here not all countries are equal. Debt and deficit dynamics are reasonably well understood, with sustainability depending on the relationships between key numbers including the initial debt ratio, primary balance, the average rate of interest paid, the rate of GDP growth and the rate of inflation. Some countries are more vulnerable than others on the basis of these metrics (Figure 19). The recovery will help growth numbers and hopefully at least prevent inflation falling further, while re-opening of economies should mechanically lead to big declines in some items of public spending (furlough, support grants, etc.). Keeping borrowing rates low will be crucial and it is plausible that some nations – in both emerging and developed markets – could struggle. Recovery should allow governments to consider any required fiscal adjustments, but another danger, as before, is that some become overenthusiastic about tightening and introduce fiscal cliffs.