We forecast that advanced economies’ debt-to-GDP ratios will be over 20 ppts higher by the end of 2021 than at the end of 2019. And, given aging populations, minimal societal appetite for fiscal austerity, and low debt-servicing costs, we expect government spending to remain elevated by historical standards. Excess savings should enable relatively comfortable debt financing in the near term. But in the medium term, we think that debt financing will require some combination of higher taxation, regulation to encourage greater institutional investment in government bonds, or moderately higher inflation, underscoring the importance of owning “real” assets such as equities.

Post-COVID-19 debt levels are forecast to increase

US Federal debt held by the public, 2000 to 2050, in % of GDP

The pandemic has had a negative effect on employment for lower-skilled workers, while the nature of knowledge work, which can largely be performed from home, and the financial markets’ good performance have favored high-income and high-wealth individuals. In the future, technological disruption could widen the wealth gap even further. Whether wealth inequality reaches its political limits in the coming years remains to be seen, though we should expect to see more political leaders running on platforms that include some element of wealth redistribution. The resulting potential regional variations in economic policy make global diversification particularly important.

Higher-paid workers are likelier to be able to work from home

% of US respondents who worked from home or stayed home from work and were unable to work

Political considerations in an increasingly multipolar world, security concerns in light of the pandemic, consumer preferences tilting toward sustainability, and new technologies enabling localized production are all contributing to the world becoming more local. The aggregate effect on growth and inflation is unclear. But these factors can be expected to favor companies exposed to automation and robotics, companies already factoring sustainability into their supply chains, and companies based in ASEAN and India that could benefit from supply chain diversification out of China.

The pandemic has triggered more corporate conversations about localization

Number of mentions of keywords related to supply chain diversification in transcripts

The COVID-19 pandemic has forced much faster digital adoption and disrupted established norms. This could transform various industries, and, combined with the unfolding impact of the fourth industrial revolution, could boost medium-term productivity. The crisis could also have the effect of suppressing real interest rates because the more efficient use of capital stock and a shift from tangibles to intangibles lowers the demand for investment capital. On the flip side, a more digital world will produce its fair share of losers too. We see particular risks for physical retail and traditional energy over the course of the next decade.

Demand for carbon is still rising, but in 2020 the EU and Japan pledged to go carbon neutral by 2050, and China promised to do the same by 2060. Stricter environmental regulations could mean higher costs for some businesses. But companies that are well positioned for the transition, such as those providing greentech solutions, stand to benefit from a more sustainable world.

The EU’s goal is climate neutrality by 2050