In contrast to the financial crisis, fiscal policy has also been affected by the COVID-19 pandemic. Governments around the world have put together massive aid packages to provide companies with sufficient liquidity and reduce the wage losses of employees. This was urgently needed to counteract the global recession, but as a result, the already high levels of national debt in many countries look set to skyrocket at an unprecedented rate. The International Monetary Fund estimates that the increase in global public debt in 2020 will be more than six times that of last year.

It will be important to consider how governments intend to reduce their debt, although this will probably vary from country to country. We believe a combination of the following two mechanisms is likely:

Financial repression: We expect central banks to continue purchasing large amounts of government bonds, meaning a large part of the new debt of states will end up on central bank balance sheets, where it will remain. As a result, interest rates will stay low and investors will increasingly have to shift into risky assets in order to achieve higher yields. As in recent years, the liquidity provided by central banks will remain an important support for risky assets such as equities or corporate bonds, but in the long run, it also holds the potential for higher inflation rates. As inflation rises, the debt burden is reduced, meaning it is basically in the interest of governments that inflation increases. However, this is not something that can be managed directly and without collateral damage. Accordingly, in view of the strongly deflationary developments we are currently seeing, we regard a sharp rise in inflation as unlikely. However, the acceleration of protectionism (see Trend 2) should cause inflation to rise again somewhat in the longer term.

Tax increases: We consider the likelihood of industry-specific tax adjustments to be high, since proposals for environmental taxes and higher contributions from IT companies were already on the agenda before the COVID-19 crisis. The European Commission’s proposal for the EU-wide aid package, for example, is intended not only to support construction but also to be an investment in the future, as part of the Next Generation EU. In particular, the plan is intended to support the European Green Deal and digitisation. In principle, tax increases are poison for growth dynamics, which is why they should only be tackled once the economic situation has stabilised sufficiently.

Globalisation has shaped the global economic picture in recent decades. However, with increasing inequality, there is growing political pressure to focus more on domestic policy and to adopt more protectionist approaches. This led to the policy of America First, and in turn to a trade dispute between the USA and China. The outbreak of the coronavirus and the resulting recession is likely to exacerbate the imbalance in income distribution in many places, thereby reinforcing populist and protectionist trends. Recent months have already seen 90 countries introduce new export restrictions on medical goods and medicines. One of the consequences of this is moderately higher inflation, given the higher tariffs and increasing domestic production involved. Those companies that have already started to diversify their supply chains or are able to produce cheaply at home thanks to new technology should benefit. Countries such as China and sectors whose economic growth is heavily dependent on global trade are likely to lose out.

The lockdown measures in the wake of the pandemic turned everyday working life, education and consumer behaviour upside down practically overnight. As a result of the easing of measures, the use of online services will decline again somewhat, but the COVID-19 crisis has certainly massively accelerated the acceptance and spread of digital services. This means that employees are likely to work more from home in the future as well. This will result in subdued demand for office and residential space in conurbations and could thus counteract the imbalance in demand between the periphery and urban centres. At the same time, the accelerated upswing in online retail is inhibiting demand for retail space. For the economy as a whole, however, this could trigger a boost in productivity and thus lead to stronger economic growth and higher inflation. Yet at the same time, the increase in online trade would have a deflationary effect, as many goods tend to be cheaper online than in shops.

Sustainable investments have been put to the test during the COVID-19 crisis. They have passed this test as in weak market phases, the resilience of a company is particularly important. Among other things, this requires good performance in various sustainability factors, such as environmental, social and governance (ESG) criteria. For example, a company must be proactive in dealing with the effects of climate change or water pollution (E). In addition, employee satisfaction and stable customer relationships are relevant in the social area (S). Finally, robust governance (G) is the prerequisite for being well positioned to act quickly and decisively in future critical situations. This resilience pays off not only in the long term, but also in uncertain times. A study by BlackRock showed that 94% of sustainable indices have performed better than their traditional parent indices during the COVID-19 crisis.