The economy may be stabilizing faster than expected amid the COVID-19 pandemic, but efforts to preserve it could tip off a financial crisis, economists said in a new report.
Deutsche Bank economists led by Peter Hooper, the bank’s global head of economic research, said the global economic recovery “has proceeded significantly faster than we envisioned in the gloomy days of early May.”
They estimated that the world’s economy has already recovered about half of the GDP it lost and that it would get back to pre-pandemic levels by the middle of 2021, which is a couple of quarters sooner than the bank’s previous forecast.
But the price of short-term stability could be steep in the long run.
“Massive fiscal and monetary policy stimulus” that came together to prop up the economy has caused debt to balloon and stocks to become potentially overvalued, posing “the serious risk of a looming global financial crisis as central banks begin to shift away from easy (monetary) policy at some point in the years to come.”
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“Financial crises have often been touched off in the past under such conditions by the inevitable shift from policy ease to policy tightening, which is likely still at least several years away, but could surprise sooner,” the Deutsche Bank economists wrote.
From a global health perspective, Deutsche Bank projected that “widespread vaccination” will begin by summer 2021 and will continue for the next year or more, leading to “a significant move toward herd immunity in the global population over that period and into 2023.”
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