Macro Monthly – The pitfalls of a fast rebound

While the world is eagerly coming out of its shelter, the difficulty is how to navigate between maximizing the rebound and minimizing the chance of a renewed wave of infections. In some parts of the world, particularly the US, we see a faster than anticipated rebound, a subsequent increase of infections leading to renewed restrictions and a dip in economic activity. In other parts of the world, most noticeably China, we see a much more slowly and orchestrated rebound taking place. Although local mini waves of infections have occurred, it seems relatively well contained and therefore unnecessary to re-instate restrictions on economic activity. For Europe the key question is whether it is able to learn the lessons from the East, avoid the pitfalls from the West, and find the precarious balance to economic recovery. Our base case scenario of a slow and protracted recovery, still seems most probable. But the hunger for a V-shaped rebound is also gaining traction. Given the above mentioned risks of a hurried reopening, we also see growing risks of a second wave of infections and a renewed lockdown, albeit in a lighter variant. In the coming weeks however, all eyes in Europe will be on the recovery fund negotiations, which centre more around dividing the pie, than about the rebound potential that it could entail. Plotting the Commission’s proposed budget allocation against allocations based on actual Covid-19 damage reveals that large allocation changes are at stake this week.