The four developments that will define real economies and financial markets after the health crisis

We believe that four developments are going to define both the real economies and financial markets of OECD countries after the health crisis: A rise in risk aversion, which can be expected to lead to household and corporate deleveraging, and therefore to less demand for durable goods; and to higher risk premia (on equities, corporate bonds, bank loans); An increase in corporate debt, leading to both a fall in companies’ spending (wages, investment) and to a deterioration in their financial situation (credit ratings), driving up their borrowing costs even further ; A rise in inflation, due to reshoring and wage pressures. This can be expected to result in a steepening of yield curves and a fall in investment; The highly abundant liquidity provided by central banks, which will boost financial and real estate asset prices and offset (partially, fully?) the rise in risk premia, but will also increase financial instability (bubbles, high volatility in asset prices and exchange rates, destabilising capital flows).