Economics: The upside-down global economy

The post-pandemic global economy has consistently confounded expectations and historical precedent is often not providing a good guide to its behaviour. In fact, it’s becoming increasingly clear that many aspects of the post-pandemic economy are diametrically opposed to those that characterised the decade after the Global Financial Crisis (GFC). These are just some of the differences that have struck us as important: 

A nominal GDP undershoot vs overshoot: 

First, unlike the GFC, nominal GDP has overshot its pre-pandemic trend; the recovery from the pandemic-induced downturn has marked the first time since the mid-1970s that nominal GDP has closed the gap with its pre-recession trend. 

Fiscal austerity vs fiscal activism: 

Second, fiscal activism appears to have replaced austerity: the post-GFC stimulus quickly turned into several years of austerity, whereas now in the post-pandemic era, fiscal policy has remained loose for far longer.  

A ‘debt overhang’ vs a ‘monetary overhang’: 

Third, the GFC and the period that followed were often referred to as a ‘balance sheet recession’, where households suffered a ‘debt overhang’. Whereas today we have a ‘monetary overhang’ from pandemic stimulus supporting household balance sheets.  

Deflation risk vs inflation risk: 

Lastly, current inflation risk appears to have replaced deflation risk, with factors like climate change, the green transition, and the reconfiguration of the global economy all acting as more persistent sources of upside surprises to inflation over the coming decade.