FAST FIVE: The US 2020 Fiscal Deficit Will Explode To 18%, Unseen Since World War II

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Even before the coronavirus outbreak, the post-GFC global economy had been facing the triple challenge of demographics, debt and disinflation (the 3D Challenge we have written about previously), which the world last faced in the 1930s.

However, based on the experience in China, we foresee a tepid pace of recovery initially, and it won't be until 3Q21 that output reaches pre-Covid-19 levels in the US and euro area.

Hawks will undoubtedly argue (and we've already heard murmurings) that these expansionary policies bring the risks of rising inflation and deficits and risks to debt sustainability.

However, we take the opposing view and argue that these policies need to remain in place for longer until inflation expectations have systematically risen closer to the central banks' goals.

Because expansionary policies were terminated prematurely in 1936-37, the US economy suffered a double dip in 1937-38 (see Global Macro Briefing: 1937-38 Redux?).

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