The train is coming!

After a detailed analysis of the Great Recession, a LET ME EXPLAIN BRIEFLY: large group of economists agreed that governments watched events like a train crash in the making. Sorry to use the same analogy, but the world economy may face the same situation after everything settles. Like the Long Covid phenomenon, the world will have to live with the pandemic’s long-term economic implications. Perhaps in some limited ways these effects could be for the good. For instance, the global shutdown may help to ease the pressure of global warming, if only slightly. But most of the effects will be negative. They will likely a reduction in the world’s potential output stemming from things like higher precautionary savings, tougher debt headwinds, and tax hikes, alongside some potentially less quantifiable consequences such as educational deficits. The question is whether financial market investors recognize these threats or are, instead, blocking them out in favor of the shorter-term growth surge that will happen as lockdowns are lifted. I suspect it may be the latter.


We received detailed views from policymakers on Turkey’s inflation outlook. The Central Bank promised to tighten monetary policy further if required. President Tayyip Erdogan, however, is continuing a parallel narrative: he too has now made inflation public enemy number one; he too wants to eliminate it. •nly, he believes that this must be done by cutting interest rates. Hence, ultimately the question comes back to: when will these opposing viewpoints collide? Of course, they are already colliding. So, when will Erdogan be ready to use his presidential powers to overrule the CBRT view? The answer to this question depends on when weak real economy data will begin to trouble Erdogan politically. As the CBRT’s own projections make clear, inflation targeting will be long drawn out because Turkey is coming from a bad starting point; inflation will not reach target even by the end of 2022. Erdogan is likely to get impatient much sooner. This is what markets should be prepared for.

Tatha Ghose, strategist, Commerzbank, January 29


Trade frictions, following the end of the transition period January 1, 2021, are clearly weighing on bilateral trade between the UK and the EU, though there has been no outright chaos at the borders. For now, at least, COVID -19 and government-imposed containment measures are causing far greater damage than Brexit, whose true adverse effect will only be fully felt over time. The EU and UK are now turning their attention to financial services, which have been broadly left out of the trade agreement. In terms of the timeline, both sides have agreed to reach a Memorandum of Understanding by March. EU Commissioner McGuinness, who is responsible for financial services, already warned that “there is no recreating the single market for financial services”. We expect the EU to remain very guarded and limit the access of UK-based financial firms by regulatory means. Behind these reservations lies, we think, predominantly the goal to shift as many jobs and financial activity to the EU as possible.

Dirk Schumacher, strategist, Natixis, January 27

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